A limited liability company (LLC) can be a beneficial way to organize your business, as it provides members with protection from liability and allows for pass-through taxation. However, you may have questions about whether you can hire employees for your LLC. Although the LLC can hire employees, you yourself may not be able to be an employee.
Can You Hire Employees in an LLC?
You must verify that the employee you want to hire can legally work in the U.S., obtain a Social Security number, and set up tax withholding on their salary. Find out if disability insurance is required in your state and, if so, be sure to set that up. Anyone you hire is an employee of the LLC and does not work for you personally.
How Does a Multi-Member LLC File Taxes?
LLCs enjoy pass-through taxation, which means the LLC itself does not pay taxes. Instead, each member pays tax on their share of the profits. If you are the only member, all the profit is yours and you're personally taxed on all of it on your personal tax return.
For multi-owners, each pays tax on profits in correlation with their owner's percentage. For example, if you have a two-person LLC and each are equal owners, then each member pays tax on half of the profits generated by the LLC. If there are three members that are equal members, each pays tax on a third of the profits.
If you are a one-member LLC, the IRS treats your LLC as a sole proprietorship for tax purposes. If you have two or more members, the IRS treats you as a partnership. Because there is no withholding on your income from the profits on your LLC, you and the other members will have to file personal quarterly tax returns for estimated taxes.
Can an Employee Be a Member of an LLC?
You may want to know whether LLC members are considered employees. In general, LLC members are not employees of the LLC.
If you're a member, you are compensated by receiving a share of the profits of the company, not through a salary. You also have an ownership stake and, as the company increases in value, the value of your stake increases.
However, there is one exception to the rule: if you or another member wants to be an employee, then your LLC can elect to be taxed as a corporation—which means members themselves do not pay tax on the profit.
Instead, the LLC itself must file and pay taxes. If you make this choice, then the LLC can hire members as employees, but they must receive a reasonable, industry-standard salary. When you become an employee of your LLC, you must pay tax on the income and the LLC must withhold taxes for you. You will not pay any self-employment taxes on the salary. There are specific state rules about designating members as employees, so be sure to check your state regulation.
An LLC offers a lot of flexibility as a business entity and can allow you to function as either a member or an employee, whichever you wish.