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Hm that is strange, I heard that since I am singel LLC owner/employee, IRS considers this LLC for the tax purposes as a sole propriatorship and not as a Corporation and in that case I heard I don't need to do Payroll...?

Clarification: The IRS never assumes.
You need to complete an LLC designation to call yourself a Sole Proprietorship.
Otherwise you are defaulted as a Corporation.

CC08

Tissar,

Per IRS regulations, you do not need to take salary in case of an LLC. But whether you take salary or not, there will not be any tax effect as all of your income whether salary or otherwise, will be subject to self employment tax. That is why I always suggest most of my clients to form an S corp. In most cases for small businesses, S-Corp. is better than LLC. In case of LLC, 100% of net income is subject to self employment taxes (15.30%) while in case of S-Corp., the income subject to self employment tax is typically 30-50% of net income. I have illustrated this and the tax saving impact, on my website with the help of an example. Please see "FREE DOWNLOADS" page on my web site www.GlobalAccountingAssociates.com and download the excel file, review and give me your feedback, if any.

Hope it helped.

Sirebral, I'm not sure I understand -- a Limited Liability Company, by definition, provides limited liability to its members (owners) even if there is only one -- does it not?

Hmmm . . . we may have to agree to disagree -- or perhaps an LLC has different rules in your state (I guess that's possible). "Member" = "owner" for an LLC. In Texas, an LLC can be formed with only one initial member (owner), and must choose when filing to be member-managed or manager-managed. A one-person business is naturally going to elect to be member-managed (otherwise, what's the point?), in which case the law reads: If the limited liability company is managed in whole or in part by members, all articles of this Act shall apply to those members to the same extent as they would to managers of a corporation.

A sole proprietor does not have limited liability, but a one-person LLC member-manager does (limited to the amount of his/her initial investment -- here, anyway).

This thread is a little all over the place. Rather than address each point, I will summarize my understanding. The tax part is 100% accurate. The liability/legal is just what I have gotten from attorneys not being one myself.

In all US states that recognize LLCs:

• A single member LLC is a sole proprietor unless you elect to be taxed as a Corp (8832) or S Corp (8832 and 2553).
• A multi member LLC is taxed as a partnership unless the above elections are made.
• LLC members and managers who have not provided personal guarantees with a few exceptions are not liable for the debts of the entity or the torts of its EE's, other members or managers so long and the articles of organization, operating agreement, state and federal laws are adhered to by the "innocent party". There are environmental laws and I am sure other examples from which there is little to no protection by any form.
• Some states do tax LLCs similar to corporations. I don't know if the members are then taxed additionally on their distributive share as well.

To answer the original question: It is completely wrong for you to take a W-2 unless you have made a corporate election. You may be required by some states to pay unemployment on yourself, but you will pay Federal Self Employment Tax and no Federal Unemployment tax on yourself.

PS - I strongly recommend getting an EA or CPA to help from the beginning and on an ongoing basis. I don't want to sound condescending, but if you need these answers here, you should probably not go it alone. There are too many opportunities to do things wrong. Your interests are likely better served in the long run by focusing on your business and paying someone a reasonable amount to CYA on these matters.

Good Luck.