Do I have to worry about payroll taxes?

by Anthony

My wife and I want to form an LLC to protect a couple of rental properties we own, and are currently renting out. The rents will then be paid to the LLC. When that rent money passes to us, do we have to worry about payroll taxes (income tax withholding, Social Security, Medicare)? Or is that only if we were to hire employees?

If so, does it work the same way with an S-corporation? Or is one better than the other in this regard?

Answer

As a member of the LLC, you are not a W-2 employee. Therefore, the usual issues of payroll (withholding employee's taxes, matching FICA and Medicare, quarterly remittances, etc.) are not in place.

If you hired an employee, then obviously payroll would become an issue. In that situation, I suggest using a payroll service. The penalties for payroll mistakes are steep, and the government has the resources to chase you down.

However, as an individual, you are liable for estimate quarterly taxes. If all your income comes from W-2 wages, then you don't have to worry about estimated taxes, because your employer is already withholding them for you (you are still paying them, the employer is simply writing the checks out of your now-reduced paycheck).

Once you have income coming from any source other than W-2 paychecks (such as dividends, capital gains, self-employment, or a business), then you need to file your estimated tax payments.

Failure to pay estimated taxes is not criminal, though it will subject you to both interest and penalties (filing a false return is criminal, however).

You will also not withhold Medicare and Social Security (aka FICA) from your LLC's distributions to yourself. Self-employment income is generally subject to self-employment taxes (another word for FICA and Medicare).

However, rents are generally not subject to self-employment taxes.

The best way to navigate this issue is to either use good tax software or an accountant. Good tax software is far less expensive than an accountant, however, you need to either know what the tax terms mean, or be willing to learn :)