Can an LLC Have Employees? Here’s the Answer!
The answer to “can an LLC have employees?” is yes!
In fact, an LLC can have as many employees as it wants, there is no limit to the number of employees a limited liability company can have.
That being said, there are a few things to know about limited liability companies and their employees, which we are going to cover in this post.
Limited Liability Companies are one of the most popular business structures because they provide several benefits to the owner(s) of the company.
The two main reasons that business owners choose the limited liability structure are:
- The business owner is not liable for the company’s debts or liabilities and can choose their own management structure.
- They qualify for pass-through taxation – meaning that profits are only taxed once.
To learn more about LLC’s, visit out What is an LLC article here.
According to the IRS, the legal definition of an employee is, “anyone who performs services for you is your employee if you can control what will be done and how it will be done.”
Furthermore, an employee is any individual who is hired for a wage or salary to perform said services.
Independent contractors do not work directly for the company but are hired for a period of time to perform a specific project or service under an agreed upon contract.
Independent contractors are themselves business owners while employees are not because they work directly for a business as an employee.
Independent contractors are 1099 workers, meaning they receive a 1099 Form for tax purposes, while employees are W2 workers and receive a W2 Form for tax purposes.
Knowing the difference between an independent contractor and an employee is important because that will determine if the hired worker is eligible for any company benefits such as health insurance as well as worker’s compensation.
To take that even further, this will determine if the LLC can be held liable for any damages caused by the individual.
Limited liability companies provide liability protection for the member(s) of the LLC but this protection does not extend to the employees of the LLC.
In other words, if an employee causes damages effecting the LLC, the LLC member(s) are protected under the limited liability protection, but the company and employee are not.
The LLC itself can be held liable for damages caused by an employee.
LLC members, according to the IRS, are considered self-employed and thus they have that limited liability protection for their personal assets.
While yes, as an LLC member you work for the LLC, this does not automatically legally make you an employee.
This is why the liability protection is valid for members only and not employees.
So how exactly can an LLC hire employees?
Let’s discuss that next.
Hiring Employees for your LLC
In order to hire employees, an LLC must have an Employer Identification Number (EIN), which is issued by the IRS.
The EIN number you receive from the IRS is going to be used when the LLC files its taxes, financials, payroll information, and any other documentation.
Some states will require that you also register as an employer in addition to other LLC registration filings.
The employer classification will be used for tax purposes but also for any annual filing or compliance requirements in your state.
Once you have your EIN, you can hire employees and set them up on payroll.
The IRS will require an LLC with employees to file returns and pay payroll tax, just like any other business entity.
LLC Taxed as an S Corporation
Sometimes LLC member(s) choose to be taxed as a corporation and thus change their business status from an LLC to an S Corp.
This will require all member(s) to receive a reasonable salary as employees.
If a member of an LLC decides to become an employee and take a salary, the salary will be sujest to federal withholding taxes rather than self-employment taxes.
This can get a little tricky, but when done correctly, there can be some really great tax advantages.
- LLCs can have an unlimited number of employees.
- The IRS defines an employee as “anyone who performs services for you is your employee if you can control what will be done and how it will be done.”
- Employees and Independent Contractors are not the same thing – Employees work directly for the LLC while Independent Contractors do not.
- In order to hire employees, LLCs must first acquire an Employer Identification Number (EIN) from the IRS.
- While member(s) of the LLC are personally protected from damages caused by an employee, the LLC itself can be held liable for damages caused by the employee
- LLC members who wish to be employees can structure their LLC as an S Corporation.
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