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.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.