SMLLC, as disregarded entity and owner's pay

[Jim-from-Ohio]

I know they should not be on payroll.. I am getting push back from a client that started a SMLLC and they are trying to tell me it is fine to be on payroll.  I sent them some payroll articles saying how the owner should just take a member draw but they are insisting all their colleagues who started their own LLC pay themselves through payroll.  Besides sending them the articles showing how that is not proper to be on payroll what do you think I should do?  Note: When looking for articlese on the topic I ran across one that said it was ok to be on payroll.. that seemed to be the exception and maybe the author just is not informed on the topic. 

[qbteachmt]

"but they are insisting all their colleagues who started their own LLC pay themselves through payroll"

My mother used to say, "Just because everyone else is doing it, doesn't make it right."

I've seen many who are advised to contact ADP and think that includes them on payroll.

I teach this as: You are not a cost to your own business, because, as a Sole Proprietorship, you are the business. There is no differentiation in the entities. The business is all yours, and you take money any time you want to. The taking or not, is not the taxable event (thankfully). You know this, because you file the Sched C at the end of the year, and that's when everything is reported.

And for the opposite, explain how corporations are their own entity, and this separates self from business. The Supreme Court ruled that Corporations are people, too, in Citizens United. A corporation cannot run a business. It isn't a human. It hires humans. That's why shareholders are on payroll.

LLC is a State construct to try to shelter assets from liability issues. It is neither of the above, until you elect a specific tax treatment, such as SMLLC is treated as SP and multi-member is partnership or S Corp.

[IRonMaN]

You have tried to communicate with them the correct way to do things.  If they don't listen, tell them to have a nice day and have them find someone else to do their work.  Life is too short to be wasting time trying to convince someone that doesn't want to listen.

[PATAX]

QB and Iron Man are correct. Since your client thinks that they are Nikola Tesla Jr, then tell them to do their tax return themselves or go to the accountant of their colleagues. 

[abctax55]

".....what do you think I should do?"

Terminate the relationship.  Life is too short to interact with a client that doesn't value your expertise/knowledge.  A question is fine, but once you've answered the question and they 'still push back'... buh bye bye.

[abctax55]

OMG... I just googled SMLLC owner payroll.  There is a Forbes (!) article saying it is OK to do so; it gives a caveat about "reasonable compensation" considerations.   

There's no hope..... one can't battle "I read it on the internet".

[Jim-from-Ohio]

@abctax55 yep.. I ran across one that said it was ok to put owner of disregarded LLC on payroll and to follow the "60/40" rule for ratio of payroll to "dividends".. Three strikes in that one single comment, not just one strike.

[Strongsilence-CPA]

Let us know if:

a. You are billing them for the true worth of the advice

b. They pay it.

Some relationships are worth the time (whether paid or not) and others can't decide that for you.

[TaxGuyBill]

Jim, that sounds like a client that is beyond your 15 minute schedule.  NEXT!

[George4Tacks]

Has the SMLLC filed it's first return? What was the entity selection on that return? Maybe the want to be a Corporation or maybe even better a S-Corp. Maybe you don't have have the whole story. 

[abctax55]

Bill... hell, just reading this thread takes 15 minutes 😘

[Jim-from-Ohio]

@George4Tacks hey George.. I wrote her back.. said the only way this can work is she chose C Corp, (which I do not recommend) or elect S Corp status. She said she wants to be an S Corp.. a trend I see lately.  some FICA savings (maybe) but the numbers have to be big enough to justify all that goes along with the S Corp. 

Well now she wants to meet to review the pros and cons of being an S Corp vs just being treated as a SMLLC. more business for me it sounds like.. and yes, no longer a 15 minute return.. well the 1040 may take 18 minutes now but another 20 for the S Corp maybe, assuming I have a clean Balance sheet and income statement, which if I get her to see a good idea is to do monthly books, which I can do this may turn out ok afterall.  

[George4Tacks]

Balance Sheet? New S-Corp getting advice from the internet and a Clean Balance Sheet? Be sure to increase your billing rate for this client. 

[Jim-from-Ohio]

meeting with her next week.. She has been in business a few years, as a SMLLC.. Am I reading the 2553 instructions right.. the way I read it since this is August already we should put down 01/01/2025 as the effective date of S Corp election?

[Terry53029]

@Jim-from-Ohio you could show them the IRS instructions for schedule C. On schedule c line 26 is where you deduct salaries and wages, and it states "Do not include salaries and wages deducted elsewhere on your return or amounts paid to yourself." That should show them, sense they cannot deduct any thing they pay them self why would they issue them self a W2 

[Jim-from-Ohio]

So I met with her.. in her emails before we met she was so sure S Corp was the way to go.. she grosses about $ 60,000 a year.. she is a counselor.. all revenue is dervied by her counseling.  had a conversation about reasonable salaries, payroll processing expenses, additional accounting involved, separate tax return, 1120S required, add't costs for all of those items, reduced social security benefits down the road... yes, maybe some current potential FICA savings but even though it would have been more business for me, I presented the pros and cons of being an S corp and at tthe end of the meeting she agreed to just stay a Schedule C SMLLC, though I never tried to steer her decision.

[BobKamman]

"Put yourself on payroll even though you file Schedule C? I think that's a great idea!  I've been trying for years to get you to send in that little quarterly payment voucher for estimated taxes, but you just won't do it.  Now you can pay someone else to fill out a three-page return! And that qualifies you to pay unemployment taxes, also.  Not that you would ever be allowed to collect unemployment benefits by saying you laid yourself off.  There are rules against that."  

[IRonMaN]

Bob - you are back.  I was beginning to wonder if I should start checking out the obituaries or the list of the latest lottery winners.

[BobKamman]

Smart enough to leave Phoenix in July.  Not smart enough to figure out a way to avoid it in August.  Spent some time above the 50th parallel, including ancestral lands in Norway, and thought about never coming back.  But then, the possibility of Minnesota Nice becoming part of federal government was a lure.  

[IRonMaN]

Minnesota Nice definitely is something that more people could use these days 😁