Single owner LLC

[crobertson]

I started a business a few years ago. I'm a single Owner LLC (taxes are combined with my personal taxes) my wife works with me.

My question is, should I pay her? I pay her cash, but I'm not quite sure the best way to handle labor and expenses etc.

[Bobby]

This is a good question. I'm in a similar situation. I was originally going to say that if you file your taxes as married filed jointly, the money is being taxed in the same way no matter how you do it. If you treated her as an employee, you'd have to file all the paperwork for doing that and it's a huge PIA if you haven't already done so. I'm still dragging my feet on hiring my first employees due to the workman's comp insurance and the tax withholding etc..

I guess if you get really technical, you have an undocumented employee and you're paying "under the table" because she's not your business partner. Somehow I think this is pretty low on the radar of the IRS.

Bobby

[gregfallon1]

Is she or will she be member? Do you file a joint return? Could be 1099 or W-2 depending on the situation if she is not a member. Are you in a community property state?

[Freelancier]

As always, check with your accountant, because they will be most familiar with your situation.

If she's an employee and you want to pay her a salary, then you need to set up payroll stuff for her, including contacting your state Dept of Labor for a DOL number, and I'd recommend an inexpensive payroll service to handle direct deposit and paying your taxes and filing tax forms electronically (we use Intuit Online Payroll and love it, but the cost may be a bit higher than what we're paying, so also look at SurePayroll and other competitors and make sure they do all the filings for your state, because it's just a hassle otherwise).

If you just want to spin off "dividends" from the company (it's not really dividends, but that's an easy way to think about it), then it's called an "owners draw" and you just do it and record it and it's a non-taxable event (since you're just taking out equity from the company and you'll pay the taxes like a self-employed person anyway). For the most part, our accountant advised us that my wife is the same as me these days in the eyes of the IRS for any single-person LLC or S-corp when it comes to dividends or benefits. If I give it to her outside of payroll, it's the same as if I gave it to me.

[Business Attorney]

The answer is it depends. I believe that the answer is different in a community property state, but my state (Illinois) is not, so I don't claim to be sure. In a non-community property state, if you are the sole member and you pay your wife for her services, she is either an employee or an independent contractor, depending upon the facts. You and she are not treated as one person.

She cannot take a draw as a member if she is not a member. If she IS a member, then in a non-community property state, your LLC will have to be treated as a partnership or corporation for tax purposes, not as a sole proprietorship. see Is a Husband-Wife LLC Treated as a Single Member LLC? (http://www.limitedliabilitycompanycenter.com/husband-wife-llc.html) Again, the answer can be different in a community property state.

You should get advice from your accountant or attorney on the tax treatment in your particular situation.

[Freelancier]

In a non-community property state, if you are the sole member and you pay your wife for her services, she is either an employee or an independent contractor, depending upon the facts. You and she are not treated as one person.

Cool! Learned something new today. Despite the rain here that just won't quit, it's still a good day! THANKS!