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Is Owning an LLC Considered Self Employed?

Attorney Thomas B. Burton answers the following question: Is Owning an LLC Considered Self Employed?

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Transcript of Video: Is owning an LLC Considered Self-Employed?

"Is owning an LLC considered self-employed?"

Hello, I'm Attorney Thomas Burton. I'm an estate planning and business law attorney here in Wisconsin and that's today's question.

If you own a single member LLC, you are considered self-employed for purposes of federal income taxation. It wouldn't even have to be a single member LLC, it could be a multi-member LLC, let's say with two members each drawing income from the business, but you will owe self-employment tax what is called self-employment tax on your income.

When you work as a W-2 employee, generally you must pay social security, unemployment and Medicare tax on your earnings. But when you receive a W-2, the employer pays one half, and you pay one half from your paycheck. The total adds up to about 15.3 percent but generally, on your pay stub you only see 7.65 percent being taken out.

When you own the business, you will be responsible for paying quarterly what is called the self-employment tax.

Now I know when working with business forms, sometimes it asks if you are self-employed. So both a sole proprietor, someone who's operating is a sole proprietorship and someone who owns an LLC, can be considered self-employed.

You and I both know that when you form an LLC, you actually have a limited liability company and you are working on behalf of the company. So the difference is there you have a state level entity set up to help protect you from unlimited personal liability because with the sole proprietorship, you have unlimited personal liability for the debts and liabilities of the business and that's the reason why an LLC is so popular for small business owners is it provides the limited liability protections of a C corporation without a lot of the formalities required of a C corporation.

For purposes of the tax code, where I see this come up a lot is dealing with tax paperwork, they may ask or even a loan, are you self-employed and in my experience, if you're the sole member, sole owner of a single member LLC, that's what they're getting at, if you own it and do the work they're asking are you self-employed.

For example, let's say a lawn care business, a single member LLC, one person is the 100% owner, they do the work in the business. They would be considered self-employed for purposes of taxation and they would owe that self-employment tax on the income and individual income tax.

As a reminder, that 15.3 percent is off the top of net business income, meaning, total business income minus expenses, net business income to the owner because an LLC by default, is a flow through entity. It means all income and expenses of the business are reflected on the individual owner's tax return.

You owe the self-employment tags on the net business income and that starts on the first dollar of income and then you also owe individual income tax at your individual income tax rate, so from 10 to 12 to 20 and up from there, depending how much income you have, that rate can increase.

You owe both taxes when you own the LLC and you are considered self-employed and need to pay that self-employment tax and as a reminder you must pay that on a quarterly basis, four times a year because no one is taking it out of your paycheck, weekly or bi-weekly as would be the case with a W-2 employee.

Great question and thank you for asking. Thank you for tuning in. If this question has been helpful to you, please consider giving it a LIKE, so others can see and benefit from this information as well. Thanks for watching and we'll see you next time.

© 2023 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.

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