LLCs, entity classification and tax reporting: a rundown

LLCs are a popular choice among small to mid-sized businesses aiming to safeguard their owners from legal liabilities. However, the tax implications of forming an LLC are frequently misunderstood by business owners.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: What is the difference between Form SS-4 and CP-575?

A: Taxpayers apply for an employer identification number (EIN) with Form SS-4. CP-575 is a notice/letter from the IRS confirming the business owner has been granted an EIN.

Q: Is it possible to receive a duplicate CP-575 for a business that was formed many years ago?

A: No. Even though the IRS will not replace or provide a copy of the original CP-575 letter, taxpayers can request an EIN Verification Letter (147C). To obtain Letter 147C, contact the IRS at 1-800-829-4933.

Q: Can sole proprietors who become a single-member LLC (SMLLC) or an LLC taxed as an S corporation give themselves wages on Form W-2, Wage and Tax Statement?

A: They cannot give themselves a W-2 if the LLC is taxed as a sole proprietor on Schedule C. On the other hand, if the LLC is taxed as an S corporation, they must receive reasonable compensation on Form W-2.

Q: How is it decided whether a partner should receive a guaranteed payment versus a salary? Is it the same for S corporations?

A: A partner cannot receive W-2 wages, but they can receive guaranteed payments for services. S corporation shareholders do not receive guaranteed payments. Instead, they receive W-2 wages for services.

To learn more about understanding LLCs and entity classifications, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.