W-2 Wages From a Single-Member LLC: Allowed? How to Fix It

Can the owner of a single-member LLC be paid W-2 wages?

No, unless the LLC has elected corporate treatment. A single-member LLC is ignored for income tax, and the regulation says it is not the employer of its owner, so the owner is not its employee for payroll tax (26 CFR 301.7701-2(c)(2)(iv); IRS: single member LLCs). The owner is self-employed. For its other employees the LLC is a separate employer; see below.

A case is more than a paperwork fix when:

• Payroll already ran. Deposits, quarterly payroll tax returns (Form 941), a W-2 and often the annual federal unemployment return (Form 940) exist under the LLC's EIN, and each needs its own correction (Form 941-X for the quarterly returns, Form W-2c for the W-2).
• An S election may cover some of those dates, or you cannot tell whether one was filed or accepted. An election changes the answer only from its effective date, never before it.
• The LLC also has real employees. Their payroll stays, so a correction must remove only the owner's pay.

If any of these applies, settle which path covers each pay date before anything is filed: a wrong correction adds a second set of wrong filings.

Start by gathering the payroll reports, the Forms 941 and W-2, and any Form 2553 or 8832; the full list is near the end.

Why does my payroll app want to run me as an employee?

A payroll app's setting does not change how the IRS classifies the LLC. Only the LLC's ownership and any election do (IRS). An owner who works in an S corporation is its employee, so the setting fits that case and does not fit a disregarded single-member LLC (see the S corporation section below).

Before the next pay date, find out whether the LLC filed Form 2553 or Form 8832 and whether the IRS accepted it. If neither was filed, the regulation treats the owner as not an employee of the LLC, so payroll for the owner does not fit its tax status, whatever the app allows. If the owner cannot tell whether one was filed, treat that as open and find the filing and any IRS letter first.

How is an LLC owner paid instead: owner's draws, not wages?

A disregarded single-member LLC owner is paid by draws. The LLC's whole profit is taxed to the owner, drawn out or not, and no one withholds tax from a draw.

I already ran payroll for myself: what was filed and what must be corrected?

If no election covered those pay dates, every filing that included the owner's pay needs its own correction; none fixes itself. Pay dates on or after an effective S election are not a mistake (see the S corporation section below); only the earlier dates are corrected.

How long you have. Overreported tax on a filed Form 941 can be corrected within 3 years after the Form 941 was filed or 2 years after the tax was paid, whichever is later. A quarter past that window is a point for professional review.

How the tax comes back. As a credit on the current Form 941 or as a refund claim; fixing a payroll mistake covers the two routes and their deadlines.

What the form asks. Form 941-X also asks the LLC to certify that it filed Forms W-2 or W-2c, and to certify repayment, reimbursement or consent for the employee share of Social Security and Medicare tax that was withheld (IRS). How those lines apply when the "employee" is the owner is a point for professional review.

Income tax withholding is the trap. Generally, federal income tax withholding can be corrected only if the error is found in the same calendar year the wages were paid, and an overcollection only if the amount is also repaid in that year. For earlier years, Form 941-X cannot change income tax actually withheld, except for administrative errors and cases where section 3509 rates apply; the wages and the W-2 must still be corrected (IRS). The instructions say the amount actually withheld, shown on payroll records or the Form W-2, can be used by the employee to claim a credit on the individual return. They do not address an owner who was never an employee. How that credit works here is a point for professional review before the personal return is final.

Stopping payroll. The Form 941 instructions say an employer that has filed one must file each quarter, even with no wages, until it files a final return (line 17) or an exception applies (IRS). Form 940 has its own final-return box (IRS). The instructions do not address an LLC whose corrected returns show no wages at all; how to close the accounts in that case is a point for professional review.

The books. The owner's pay moves out of wages and payroll tax expense into an owner's draw. Social Security and Medicare tax that comes back as a credit or refund is a receivable, not an expense. Income tax withheld that Form 941-X cannot change should not be booked as a receivable until it is settled how it is claimed on the personal return, the open point above. For the general method, see fixing a payroll mistake.

I received a W-2 from my own LLC: how do I file my return?

Settle which path applies, make the LLC's payroll filings match it, then file the personal return. The Form 1040 instructions tell a worker with an incorrect W-2 to ask the employer for a new one (IRS); here the employer is the owner's own LLC.

1. Settle the path. No effective S or corporate election means the pay was not wages. An effective election means it was, from that date (next section). A corporate election alone makes the LLC a C corporation, which generally files Form 1120; an S election makes it file Form 1120-S (IRS: Form 1120; IRS: Form 2553).
2. File the corrections if there is no election covering the pay, matched to what was filed: Form 941-X or 944-X, and Form W-2c for a W-2 already sent to the SSA, as in the table above.
3. Report the whole profit on Schedule C, with Schedule SE, if no election covers the pay. The pay is not a wage deduction (IRS).
4. Fix a return already filed. If no election covers the pay and the return reported the W-2 on line 1a or deducted the pay as wages, it may need Form 1040-X, with the W-2c attached (IRS).
5. If an election does cover the pay, the W-2 stands: its box 1 amount goes on line 1a (IRS), and the LLC files Form 1120 or Form 1120-S, as in step 1. For how much to pay an S corporation owner, see S corporation owner salary.

Would an S corporation election make W-2 pay correct, and from what date?

Only from the election's effective date, never before it. An S election is not open to every owner: an S corporation cannot have a nonresident alien shareholder (IRS), so an owner who is one cannot use it to make W-2 pay correct. An eligible LLC that timely files Form 2553 is treated as a corporation from the effective date and does not also need Form 8832 (IRS).

• Timely means no more than 2 months and 15 days after the tax year the election takes effect begins, or any time in the year before. For an existing calendar-year company, that is March 15 of the year the election takes effect, or the next business day if it falls on a weekend or legal holiday (26 USC 7503). A timely form can take effect on the first day of the year, so payroll from that day can be right even though the form was filed weeks later.
• Late forms may qualify for simplified relief if requested within 3 years and 75 days of the intended effective date, the LLC shows reasonable cause and acted diligently once it found the mistake, and the owners report income consistently with the election. For an LLC the instructions also require that every Form 1120-S was filed on time, or that the first year's Form 1120-S is not yet due, and the revenue procedure adds that no return inconsistent with S status was filed, which an owner's Schedule C for an affected year generally is. Where those tests are not met, the entity generally must request a private letter ruling and pay a user fee (IRS; Rev. Proc. 2013-30, section 5.03). See late S election relief.
• A Form 8832 election (corporate treatment without S status) generally cannot take effect earlier than 75 days before it is filed or later than 12 months after (26 CFR 301.7701-3(c)).
• Acceptance is shown by an IRS letter, generally within 60 days. If none arrives within 2 months of filing, the instructions say to call the IRS. Other proof of filing is a timely postmarked certified or registered mail receipt (or a designated private delivery service's equivalent), or a copy stamped accepted or stamped with an IRS received date (IRS).
• Earlier periods stay as they were. The IRS tells the entity not to file Form 1120-S for any year before the election takes effect (IRS).
• The election is hard to undo. It stays in effect until terminated or revoked, and a new S election generally needs IRS consent before the fifth tax year after the termination year (IRS). Ending S status generally leaves the LLC taxed as a C corporation, not back on Schedule C. Becoming disregarded again takes a Form 8832 election, is generally barred for 60 months after an earlier classification election took effect, and is treated as a liquidation of the corporation (26 CFR 301.7701-3).

Electing only to make past payroll right is a tax decision, not a paperwork fix: for an existing LLC, the election is treated as the owner contributing the LLC's assets and liabilities to a corporation for its stock (26 CFR 301.7701-3(g)). See whether an S election pays off.

If I elect S status, what payroll is then required?

From the effective date, an owner who works in the business is an employee and must be paid reasonable wages before non-wage distributions are made. The IRS can reclassify other payments to the owner as wages (IRS).

The LLC then runs payroll under its own name and EIN: withholding and timely deposits, Forms 941 and 940, and Forms W-2 and W-3 (26 CFR 301.7701-2).

For set-up steps and due dates, see setting up payroll and running payroll yourself; for how much to pay, see S corporation owner salary.

Does the LLC still run payroll for its real employees?

Yes. For its employees the LLC is a separate employer: it uses its own name and EIN for withholding, Social Security and Medicare tax, unemployment tax, Forms 941 and 940, and Forms W-2 (26 CFR 301.7701-2; IRS). While the LLC is disregarded, the owner can deduct what it pays those employees on Schedule C, including the employer's share of their payroll taxes.

Form 941 combines everyone. A Form 941-X must remove only the owner's wages and tax, so the payroll register has to show each person separately.

What do I gather before correcting the payroll filings?

• Payroll reports for every pay date, with the owner's lines kept apart from real employees.
• Each Form 941 (or Form 944) as filed, and proof of every deposit.
• Form 940 and Forms W-2 and W-3 as filed, with the date they went to the SSA.
• The LLC's EIN letter, and the name and EIN used on the filings.
• Any Form 2553 or Form 8832, proof it was filed, and any IRS letter accepting it.
• Bank statements showing what reached the owner's account.
• The owner's personal returns for those years (line 1a and Schedule C).
• Any IRS letter or notice about the LLC's payroll accounts.
• State payroll account registrations and reports.

Example

These examples are illustrative; all figures are in US dollars.

Payroll ran all year with no election

An LLC earns $80,000 of profit before any payment to its owner. She runs $3,000 a month, $36,000 in the year, through a payroll app, which files the four Forms 941 and sends her W-2 to the SSA. With no election, that money is draws, not wages. Her Schedule C shows the full $80,000, and Schedule SE figures self-employment tax from her profit, not from the $36,000 she drew. The four quarterly Forms 941 need Forms 941-X, and the W-2 needs a W-2c. If the app withheld income tax and she finds the error after the year ends, Form 941-X cannot change that withholding, so how it reaches her return is a question for a professional before she files.

The same owner with an election effective January 1

In February she files Form 2553 with an effective date of January 1 of the same year, and the IRS accepts it. Payroll she ran from January 1 on is payroll for an employee of an S corporation. If she also ran payroll the year before, that payroll is not wages, because no election covered it. Whether $3,000 a month is reasonable pay for her work is a separate question.

A W-2 arrives with tax withheld

A $36,000 W-2 from her own LLC shows $2,500 of income tax withheld. If no election covers that year, the W-2 is wrong: the LLC files a W-2c and Forms 941-X, her return reports the full profit on Schedule C, and the $2,500 is a point for professional review, under the withholding rules above, before the return is final.

Different for you?

• A W-2 or Forms 941 already exist for the owner: the payroll filings, the books and the personal return all have to agree, and the path depends on the election dates. Start with fixing a payroll mistake. Moving the owner's pay out of wages in the books (recording owner's draws) is bookkeeping work. Confirm the path before filing corrections, and when the LLC also has real employees, keep the owner's lines separate from theirs.
• Income tax was withheld from the owner's pay in an earlier year, or payroll ran over several years: the correction window, the withholding rule and the personal returns interact. Lay out each year before anything is filed; the books for those years are bookkeeping work.
• You think an S election was filed but have no acceptance letter: see late S election relief; the payroll dates it affects are bookkeeping work.
• You got an IRS notice about the payroll accounts: see behind on payroll taxes, which also covers who can be personally liable for unpaid payroll tax.
• The owner is not a US citizen or resident: an S election may not be open and the filing differs; see foreign-owned single-member LLC filing.
• The LLC has two or more owners: see paying yourself from an LLC.
• The LLC elected corporation or S corporation treatment: see how LLCs are taxed and S corporation owner salary.
• The LLC is an S corporation and never ran payroll for you: see S corporation payroll never run.