Are you looking to employ new talent because your business is growing, but you’re unsure whether a Limited Liability Company (LLC) is eligible to hire employees?
One of the benefits of an LLC is that you can hire employees while keeping personal and business transactions separate.
There can still be some misconceptions about the different types of LLCs and what the procedure for each looks like.
So what are the requirements for hiring employees with an LLC business structure?
Read on to learn the logistics, benefits, and some things to consider when hiring employees under an LLC.
Can Every LLC Hire Employees?
LLCs can generally hire employees provided that they adhere to relevant employment laws and regulations. However, there might be specific circumstances or industries where an LLC is prohibited from employing workers.
For example, in some states in the U.S., lawyers may only practice law as sole proprietors or in partnerships with other licensed lawyers. These restrictions may prevent a law firm from being organized as an LLC and hiring non-lawyer employees.
LLCS should seek assistance from legal or Human Resources (HR) professionals to ensure compliance with applicable laws and regulations.
For more clarity, let’s see the different types of LLCs and their hiring processes below.
Sole Proprietorship or Disregarded Entity LLC
A sole proprietorship or LLC (Disregarded Entity) may hire employees even though it is operated as a sole proprietorship. To hire employees, one must apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS) for labor and tax purposes.
When it comes to taxation, a sole proprietor pays income tax as a pass-through entity, meaning its taxes are not filed separately as a business entity.
Sole proprietors are responsible for paying three types of taxes:
- Federal income tax
- Social Security tax
- Medicare tax
In addition to these taxes, if the owner of a sole proprietor wishes to hire employees, they must also pay employer taxes, such as Federal Unemployment Tax (FUTA) and Federal Insurance Contribution Act (FICA) taxes.
An LLC partnership is a pass-through entity and can hire employees like any other business entity. They must also obtain an EIN from the IRS and register with the appropriate state and federal authorities.
Partners pay self-employment tax on their share of profits, which includes Social Security and Medicare Taxes. The LLC partnership withholds and remits Federal Income Tax, Social Security Tax, and Medicare tax from employee’s wages. The LLC Partnership must also pay employer taxes such as FUTA and FICA, as noted above.
If the LLC Corporation hires employees, it must pay employer taxes, such as the Federal Unemployment Tax (FUTA) tax, and depending on the location of your company may require the State Unemployment Tax Act (SUTA) tax.
The LLC Corporation must also withhold and remit federal income tax, social security tax, and Medicare tax from employee’s wages. In addition, as a corporation, the LLC may be subject to other tax requirements and regulations, such as corporate income tax and shareholder taxation (Double Taxation).
How to Hire Employees for an LLC
If you are still unsure of the hiring process, here’s a step-by-step guide to hiring employees for an LLC.
1. Get your EIN
To hire employees, it’s essential for an LLC to obtain an Employer Identification Number (EIN). The process is simple and can be completed online through the IRS website. The LLC must provide information such as the company name, business address, and type of business structure. Once the application is submitted, the LLC will immediately receive its EIN. The EIN is required for several purposes, including tax payments, opening a business account, and hiring employees.
2. Avail Workers’ Compensation Insurance
To comply with state regulations, LLCs that hire employees must obtain workers’ compensation insurance. This insurance provides benefits to employees who are injured or become ill due to work-related causes. The process of obtaining workers’ compensation insurance varies by state but typically involves contacting an insurance provider, completing an application, and paying regular premiums. Research your LLC’s state’s specific requirements to ensure you have adequate coverage in case of workplace accidents or injuries.
3. Register with the State’s Labor Department
This process involves submitting an application with the necessary information, such as the company’s name, EIN, business location, and the number of employees being hired. This step ensures that the LLC complies with state labor laws and regulations.
4. Provide New Hire Employee Forms
When an LLC hires a new employee, certain forms must be provided to the employee to comply with federal and state regulations. These forms include the W-4 form for federal tax withholding, state tax withholding forms, and the I-9 form to verify the employee’s eligibility to work in the United States.
5. Report Employment Taxes
To report employment taxes, LLCs must file a quarterly Form 941 with the IRS. In addition, some states require LLCs to file State Unemployment Taxes (SUTA) or state withholding taxes. LLCs should consult with their tax advisor or accountant to ensure compliance with all applicable tax laws and regulations.
Can an Employee Be a Member of an LLC?
Simply put, an LLC member can also be an employee of the company. However, there are some things to consider, such as making sure the member/employee is properly compensated and that the proper tax returns are made.
It is also possible for an LLC member to hire their spouse as an employee, but it’s important to ensure that the spouse is working for the business, and proper documentation is in place to avoid any potential conflicts of interest.
Advantages of Hiring Employees for Your LLC
Wondering what the benefits of hiring employees for your LLC are?
Here are some of the major advantages:
- Increased Productivity: With more people on board, tasks can be delegated more efficiently, which can increase productivity and ultimately expedite growth
- Diversification of Skills: Each employee brings a unique set of skills and expertise, which can broaden the range of services your LLC can offer
- Scalability: Hiring employees can help your LLC scale up its operations more easily, allowing you to take on larger projects or expand your customer base
- Reduced Liability: By hiring employees instead of relying solely on yourself or other members, you can reduce the potential liability for the company in case of legal disputes or lawsuits
- Tax Benefits: Hiring employees can also offer tax benefits, such as deducting employee salaries, benefits, and other expenses from the company’s taxable income
All in all, hiring employees for your LLC can be a valuable investment if you want to grow your business and benefit from a well-trained workforce and the legal advantages that come with it.
Things to Consider Before Hiring LLC Employees
While hiring employees for an LLC can provide many benefits such as increased productivity and growth, there are also some factors to consider when you bring on new team members.
- Increased Costs: Hiring employees can increase the costs associated with running an LLC, such as payroll taxes, benefits, and insurance
- Increased Responsibility: As an employer, an LLC assumes additional responsibilities such as complying with employment laws and regulations, managing employee performance, and ensuring a safe and healthy work environment
Unlock Your LLC’s Growth Potential With the Right Employees
It’s common to feel overwhelmed by managing your limited liability company’s financial records, and it can be tricky to find trustworthy help, especially when handling the finances of multiple employees.
At doola, we specialize in bookkeeping services that can take the burden off your shoulders.
With our accurate and up-to-date financial records, you can make informed decisions that will help your LLC grow and succeed.
Contact us today and experience the peace of mind that comes with having a trusted partner in managing your LLC’s finances.
Can a single-member LLC hire employees?
Yes, a single-member LLC can hire employees
How do I hire an LLC employee in California?
To hire an employee for an LLC in California, you will need to obtain an Employer Identification Number (EIN) from the IRS and register with the California Employment Development Department (EDD).
Can I employ someone outside the US for my LLC?
Yes, an LLC can employ someone outside of the US as long as the LLC complies with all relevant laws and regulations for hiring foreign employees, including obtaining the necessary work visas or permits and complying with tax and reporting requirements.