In the fourth quarter of 2023, there were 9.1 million unincorporated self-employed workers in the US, which accounted for 5.7% of all nonagricultural workers. While the numbers are still relatively small, it’s evident that self-employment has become a path many seek.
If you’re also looking into this route, you may have heard of limited liability companies (LLCs), which are popular among entrepreneurs. But one thing you might be curious about is this: Am I self-employed if I own an LLC?
In this article, we’ll answer the above question, as well as provide additional relevant details. That way, you’re prepared when you take action as a small business owner.
Am I Self-Employed if I Own an LLC?
The fact is that if you own an LLC, you aren’t automatically considered self-employed. Depending on what you wish to achieve, this may or may not be in your favor.
If you don’t already have an LLC, then use our free business registration service. Just take care of the state fees and our experts will handle all the paperwork and get you set up in no time.
Otherwise, here are the various scenarios you should consider regarding being self-employed vs LLC ownership.
Single-Member LLC
Do you own the LLC on your own? Then in this case, the IRS will treat your company as a “disregarded entity” for tax purposes, which indicates no separation between you and the LLC itself.
This means that your business income and expenses are reported on your personal tax return. Typically, this is on Schedule C of Form 1040, which self-employed individuals use.
Therefore, in a single-member LLC, you’re generally considered self-employed. As a result, you’re responsible for self-employment taxes, such as Social Security and Medicare. As of 2024, this is 15.3%.
As for operational control, you’re both the owner and operator of the LLC; you manage the daily functions of the business and retain all profits after expenses. In addition, you have limited liability protection for business activities, so your personal assets are generally protected from business liabilities. Do note that you’ll still bear responsibility for self-employment obligations though.
Multi-Member LLC
Another common setup for LLCs is multiple owners. By default, the IRS treats the company like a partnership, which means that you’re not classified as self-employed. Instead, you’re considered a member of a partnership.
The LLC itself doesn’t pay taxes, but each member reports their share of profits on their personal tax returns on Schedule K-1. From there, they pay self-employment taxes. As for the LLC, it files an informational partnership tax return (Form 1065).
The nuance here is that if you’re actively involved in your company’s operations, then you’ll likely pay LLC self-employment tax on your share of the earnings. Those who aren’t actively involved (limited partners) may avoid self-employment taxes on earnings, depending on the circumstances (nature of involvement and the agreement in place).
In a multi-member LLC, there’s shared decision-making, whether that’s through a member-managed or manager-managed structure. In the former, there’s a more hands-on approach for everyone, while in the latter, it’s more passive.
When it comes to legal and financial responsibilities, everyone enjoys limited liability protection. However, each owner is liable for taxes on their share of income, regardless of how active they are in managing the business.
Electing Corporate Status
Some LLC owners choose for the IRS to tax the business as an S corporation or C corporation. If you’re wondering how to avoid self-employment tax, these routes can lower your burden.
If you elect an S corp status by filing Form 2553, you’re required to pay yourself a reasonable salary and report other profits as distributions or dividends to other LLC owners. This can lower your self-employment tax liability since you’d technically be both an employee and an owner. Do note that you’re still legally an LLC, which means you’ll still benefit from limited liability protection, but you’ll have both employee and owner responsibilities.
You can also elect to be taxed as a C corporation, not it’s not as popular a route as S corp election since you’ll have double taxation. This is because C corps pay taxes on corporate profits and the owner (you) also pays taxes on any dividends received from the corporation. The good news is that the C corp structure can be beneficial if you plan to retain earnings in the company rather than distributing them to yourself as a dividend.
Like with an S corp, you’d be treated like an employee, so you’ll get a salary subject to employment taxes. Both will require more detailed reporting and compliance, so make sure you consult with a tax professional to cover your bases.
Know the Facts on Self-Employment and LLC Ownership
The answer to the question, “Am I self-employed if I own an LLC?” is “It depends.” There are some scenarios where you can be considered self-employed, and being educated on these is key to reducing your tax burdens.
In general, if you’re actively managing and working in your LLC, then the IRS will consider you self-employed. As a result, expect to have tax obligations that reflect that status. If you’d like to change that, then a tax professional can make it a smooth process.
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