Single member limited liability companies seem to be the popular choice these days for small business owners that want limited liability protection without the extra cost and hassle of an S-Corporation or a two-member LLC. However, SMLLC owners need to be aware of the court case listed below regarding payroll tax liability as they are personally liable not only for trust fund withholdings taken from employee checks (Code Sec 6672), but also the employer share of payroll taxes.
Medical Practice Solutions follows several similar rulings in the last few years regarding disregarded entities (SMLLCs) and payroll tax liability, and given the current recession it is very important the single member LLC owners understand that their limited liability protection does not extend to unpaid employer payroll tax liabilities. In plain terms, employer payroll tax consists of the taxes not deducted from the employees check, which would be taxes like employer Social Security and Medicare tax, federal unemployment tax, and state unemployment tax. The trust fund withholdings are the amount deducted from the employee’s gross pay that need to be paid to the respective agencies, which business owners have always been personally liable for.
On average, most employers stay current with their payroll tax liability, and most underpayments are the result of calculation errors. However, over the years I have witnessed several employers get behind on their payroll tax liabilities due to large drops in income, embezzlement and theft, and business owners over-extending themselves in too many business ventures. In addition, I have seen many businesses close their doors that had to deal with significant amounts of debt and/or were facing a lawsuit. If you have a SMLLC or are thinking of starting one, you should definitely talk to your attorney about this. If it is of significant concern, you may consider adding a spouse or friend to the LLC to take advantage of the credit ordering rules available to a two-member LLC.
I would also recommend using a payroll service provider or a CPA that will get you in the discipline of depositing your payroll tax timely. Whether you have a SMLLC or not, the IRS is not a creditor you want to put off as the penalties involved with payroll tax payments are very substantial.