In our Chicago South Loop Tax Preparation office, we often see sole proprietors, single member LLC members, and partners who are above the Section 199A thresholds look for W-2 wages as a means to salvage the 20 percent deduction allowed by Section 199A. They also often look enviously at the fringe benefits that are available to employees and not to them as sole proprietors, single member LLC members, or partners.
To overcome getting shorted on the Section 199A deduction or being denied fringe benefits, some sole proprietors, single member LLC members, and partners instruct their payroll services to make them W-2 employees. When the payroll services do this, the proprietors, single member LLC members, and partners believe they are now legitimate employees of their proprietorships/disregarded entities (the IRS regards single member LLC’s as a sole proprietorship/disregarded entity for tax purposes), and partnerships. This belief is wrong; Totally wrong!
- The sole proprietor/single member LLC member, may not be a W-2 employee of his or her sole proprietorship/disregarded entity UNLESS they have elected to have their single member LLC taxed as S-corp, or C-corp.
- A partner may not be a W-2 employee of a partnership.
- Some sole proprietors, single member LLC members, and partners have had their Certified Professional Employer Organization (CPEO) treat them as employees; this is also, wrong!
- Using a CPEO does not create the possibility of paying a W-2 wage to a partner, single member LLC member, or a sole proprietor.
Takeaways
The sole proprietor, nor the single member LLC member is a W-2 employee of the proprietorship/disregarded entity. He or she is self-employed and operates under the IRS rules for the self-employed. The partner is not a W-2 employee of the partnership. He or she is a partner and is treated as a partner under the tax rules. Partners receive remuneration for services as guaranteed payments, which are subject to self employment taxes.
The single-member LLC is viewed as a disregarded entity, and taxed as a sole proprietorship unless the member elects treatment as an S or a C corporation. Similarly, a multi member LLC is a partnership.
If you are looking to setup single member LLC payroll in Chicago, and learn how to pay yourself through your business, please look into our service of changing your LLC to be taxed as a S-Corp, or C-Corp.
Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
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