A Single-Member Limited Liability Company (SMLLC), defined as a business structure with a sole owner, can hire employees. Although many SMLLCs start as one-person operations, the entity is legally permitted to expand its workforce. Hiring staff transforms the SMLLC into an employer, requiring a formal operational framework for payroll, withholding, and employment compliance. This necessitates administrative and tax procedures distinct from how the owner is personally compensated.
Legal Feasibility of Hiring Staff
The ability for an SMLLC to hire staff stems from how the Internal Revenue Service (IRS) views the entity for different tax purposes. By default, an SMLLC is considered a “disregarded entity” for federal income tax, meaning profits and losses are reported directly on the owner’s personal return, typically on Schedule C. This streamlined reporting applies only to income tax liability, not to the company’s role as an employer.
For federal employment tax purposes, the IRS treats the SMLLC as a separate entity, similar to a corporation or partnership. This allows the LLC to function as the employer of record, legally separating the business’s payroll obligations from the owner’s personal income tax filings. The entity, not the individual owner, is responsible for collecting and remitting payroll taxes for its employees.
Essential First Steps for Becoming an Employer
Before the first employee receives a paycheck, the SMLLC must complete mandatory administrative setup to comply with federal and state regulations. The most immediate requirement is obtaining an Employer Identification Number (EIN) from the IRS, which is a unique nine-digit number used to identify the business for employment tax purposes. This step is mandatory even if the owner previously used their personal Social Security Number (SSN) for income reporting.
The SMLLC must also register with relevant state agencies as a new employer. This involves registering for state income tax withholding and obtaining a state tax ID number for remitting unemployment contributions. Setting up these federal and state employer accounts is a prerequisite to legally processing payroll.
Understanding Federal Payroll Tax Obligations
As an employer, the SMLLC assumes responsibility for managing and remitting federal payroll taxes, which fall into two categories. The first is the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare programs. This tax is split between the employer and the employee; the employer withholds the employee’s portion from wages and matches it with an equal contribution.
The second obligation is the Federal Unemployment Tax Act (FUTA), a tax paid solely by the employer to fund unemployment benefits. These taxes must be reported to the IRS on specific forms according to a set schedule. The employer reports FICA and federal income tax withholding quarterly using IRS Form 941, and the annual FUTA liability is reported separately on IRS Form 940.
State and Local Employment Compliance
Beyond federal requirements, an SMLLC employer must navigate additional compliance at the state and local levels. A significant responsibility is managing State Unemployment Tax Act (SUTA) contributions, which are the state-level equivalent of FUTA and fund the state’s unemployment insurance program. SUTA tax rates and wage bases vary widely by state, requiring careful attention to the specific rules where the employee works.
Nearly every state requires employers to secure Worker’s Compensation Insurance to cover medical costs and lost wages for injured employees. This insurance is mandatory and is a prerequisite for hiring. Some localities may also enforce specific payroll taxes or mandatory state disability insurance.
Required Documentation and Employee Onboarding
The employee onboarding process involves mandatory paperwork required by federal law to ensure compliance. Every new employee must complete Form I-9, Employment Eligibility Verification, which requires the employer to verify the employee’s identity and authorization to work in the United States. This form must be retained by the employer for a specific duration after the employee leaves.
The employee must complete Form W-4, Employee’s Withholding Certificate. The employer uses this form to calculate the correct amount of federal income tax to withhold from each paycheck. Employers must also display certain federal and state labor law posters in a visible location within the workplace.
Special Considerations for Hiring Family
Hiring the owner’s family members, such as a spouse or children, can introduce specific exemptions to federal payroll tax rules if the SMLLC is taxed as a sole proprietorship. Wages paid to a child under the age of 18 are exempt from both FICA (Social Security and Medicare) and FUTA taxes. This allows the business to avoid paying the employer’s portion of FICA and FUTA, and the employee avoids FICA withholding.
For a child aged 18 through 20, the wages are subject to FICA taxes but remain exempt from FUTA, offering a partial payroll tax saving. When the SMLLC hires the owner’s spouse, the wages are subject to FICA and income tax withholding but are exempt from FUTA contributions.