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Can a Single Member LLC Have Employees?

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Published on November 11, 2021

Updated on November 17, 2021

Can a Single Member LLC Have Employees?

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Can a Single Member LLC Have Employees?

A limited liability company (LLC) is an increasingly popular business structure for startups, as it offers limited liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business straight to the owners, who report the income on their personal tax returns.

Owners of an LLC are called members, and an LLC can have a single member or multiple members. Whether single- or multiple-member, an LLC can have an unlimited number of employees, which is great because you can’t do it all alone! Employees must be paid a salary or hourly wage. You could also hire independent contractors, who are contracted to do certain tasks for your company.

Are You an Employee?

As an LLC member, or owner, you are not an employee and thus do not draw a salary or wage. Members take distributions, meaning they take a share of profits, which are accounted for on the LLC’s books. You do not pay payroll taxes on your distributions. Unless you choose to be taxed as a corporation, however, you will pay self-employment tax.

Employer Identification Number (EIN)

You must have an EIN if you have employees. An EIN is like a social security number for your business, allowing the IRS to identify your business easily. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations it’s known as a Tax Identification Number (TIN).

The EIN is used to identify businesses in the United States and contains information about the state in which the company registered. It identifies taxpayers required to file business tax returns and is used by employers for filing taxes. It is normally required for businesses when they open a business bank account.

There are specific rules established by the IRS that state who must get an EIN. If you answer yes to any of the following questions, you need to obtain one:

  • Do you have employees?
  • Do you operate your business as a corporation or a partnership?
  • Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
  • Do you withhold taxes on income, other than wages, paid to a non-resident alien?
  • Do you have a Keogh plan?
  • Are you involved with any of the following types of organizations?
    • Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
    • Estates
    • Real estate mortgage investment conduits
    • Non-profit organizations
    • Farmers’ cooperatives
    • Plan administrators

Steps to Hiring Employees

Once you have an EIN, follow these steps to begin hiring employees:

  1. Devise a hiring plan and budget. Determine who you need, prioritize those positions, and set a hiring timeline. Determine how much you will pay your employees. You can check sites like Salary.com, Payscale, and Glassdoor to find average salaries and wages in your area. Then determine how those wages and salaries will fit into your budget and which end of the pay ranges fits your business best. Then you can post your job ads. Free-of-charge methods to recruit employees include posting ads on social media platforms like LinkedIn and Facebook. Alternatively, you can try premium recruitment options, including job posts on Indeed, Glassdoor and ZipRecruiter.
  2. Withholding taxes. You will need to fill out the paperwork to withhold three types of taxes. You need to complete form W-4 to withhold federal taxes, a Federal Wage and Tax Statement (W-2) for all employees, and a state withholding form.
  3. Run background checks. For the safety of all, you should run background checks on all your potential employees. There are many legal requirements for running background checks that vary by state, so it’s advisable to use an agency to run background checks for you.
  4. You need to make sure your employees are eligible to work in the United States. All employees need to fill out form I-9 and show their ID and employment authorization. Some states may require you to enroll in the E-Verify program.
  5. Report new hires. Most states have a new hire reporting department to which you need to report all new hires. Check with your state.
  6. Get worker’s compensation insurance. This provides compensation to employees who are injured on the worksite. Requirements vary by state.
  7. Set up payroll. You can either set up a payroll system on your own, or you can hire a payroll service or accountant. The system will ensure you pay employees and payroll taxes. Payroll taxes include unemployment insurance, Medicare, and Social Security.
  8. Post required legal notices. The Department of Labor requires that you post certain notices informing employees of their rights, and some states have requirements as well. You can find information about what is required from the SBA.

Help Is Available

Many payroll and human resource management firms can help with these initial tasks, as well as the ongoing management of all the processes involved in hiring and maintaining employees for your LLC. They will make sure that you are in compliance with all laws, and free up your time so that you can focus on growing your business. You can also hire your own HR manager, or just do it yourself! Just make sure you follow all laws to the letter, as errors can result in stiff penalties.