Tax Question - Single member LLC (proprietorship, sales, lawyer, corporation)

[MJJersey]

Hi all, I was wondering if someone could help me with a tax question. I am on my 4th accountant now; I asked him to help me with this and he ignored me. So I'll be on my 5th soon. I run a small part-time business as a single member LLC. I searched for the answer to this tax question online and found everything from "you do not need to pay any taxes" to needing to pay taxes on both income and payroll.

I know that I need to pay quarterly income taxes to the State and Federal government on the net income of the business. I pay myself with a quarterly draw, which is based on my net profits minus a reserve to pay taxes with. I do not pay myself a monthly salary, but I read that I am required to have some type of salary per IRS guidelines (I do all the work for my LLC).

So, from what I understand I need to pay income tax on the entire net profit and payroll tax on the salary. If I set my salary at - say 15K - can I pay the payroll tax on the 15K only and pay the income tax on the entire net profit?

Also, a related question, if I do pay the payroll tax on the 15K, do I reduce that amount from the total profit amount on which I am required to pay income tax?

Your help is appreciated.

[Submariner]

I do not have the answer for your. Sorry.



We are in the process of trying to form an LLC. We laid out what we want to do to one lawyer, he referred us to a second lawyer. Then we were referred to a third lawyer, then a fourth. The fourth lawyer, after meeting with us for an hour said that we really need to straighten this out with an accountant first. So we met with an accountant. After first hearing our plan, he called in his accounting partner, as a group we kind of figured out how to do this. Then these two accountants sent us to our fifth lawyer. Who agreed to take us as clients.

We had no idea that forming an LLC could be so difficult and unique. You may need to interview a dozen before you find one that specializes is exactly what you are trying to do. In our state, what we want to do is called a L3C, but none of these professionals are willing to do one.

I feel your frustration.

[Bradmilano]

A single member LLC is disregarded for federal income tax purposes. The IRS treats it as if it doesn't exist. Therefore you don't pay yourself a salary through payroll taxes. You make quarterly estimated income tax payments based on the entire net income of the business and you ignore whatever you pull out as a "draw".

New Jersey also ignore single member LLCs but you may have a minimum annual report. The LLC may also file sales tax returns under the LLC name depending On what it does.

[TysonL]

I'm very surprised that you guys have had so much trouble finding an accountant or attorney to help you with this question. This is a question that most accountants probably encounter ten times per day. It's accounting 101 level material.

As Brad said, how you register your business on the state level (LLC as you said), has no effect on your federal taxes unless you elect to do something otherwise through the IRS.

I'm assuming that you are either using your own social security number as the business's employer identification number (EIN) or you have a specific EIN from the IRS registered as a sole proprietorship. This is usually the case in these situations. In this case your business's income and your income are one and the same.

I don't think it matters if you put yourself on payroll or make quarterly draws. Just ensure that you are paying at least the minimum in taxes to the IRS every quarter based on the business's income as a whole. Keep in mind though that you can't deduct your salary as a business expense on your Schedule SE because, again, the business's profits and your income are one and the same.

<edit> Just to make sure you understand, FICA taxes (Social Security, Medicare) are due along with federal income taxes on the income of the entire business every quarter, not just what you take a draw on or are paid. The FICA tax rate for you is slightly above 15% because you need to pay both the employer's half and the employee's half.

[Bradmilano]

Originally Posted by TysonL

I don't think it matters if you put yourself on payroll or make quarterly draws. Just ensure that you are paying at least the minimum in taxes to the IRS every quarter based on the business's income as a whole. Keep in mind though that you can't deduct your salary as a business expense on your Schedule SE because, again, the business's profits and your income are one and the same.

The above advice is incorrect. You can NOT pay yourself through payroll as a sole proprietorship or a single member LLC. Only if the LLC elects to be treated as a C corporation or an S corporation will a payroll to the owner be allowed because the election has been made to treat the LLC as an entity.

As an FYI if you were a multi member LLC you would also not be able to pay yourself though payroll.