Limited Liability Company may not Protect Sole Owner from Payroll Tax Liability

July 6, 2007

The sole owner of an LLC was individually liable to the IRS for unpaid payroll taxes under a recent federal appeals court ruling in S.P. McNamee, CA-2 Docket 05-6251-cv, May 23, 2007. The owner, a sole proprietor of an LLC, failed to remit payroll taxes to the IRS. The IRS ignored the LLC status and assessed the unpaid taxes personally against the LLC’s sole owner by placing a lien against his property.

The appeals court held that a single owner LLC’s can elect to be treated for tax purposes as corporation or as a sole proprietor. If the LLC elects sole proprietor tax treatment than its owner is liable for unpaid taxes. If corporate tax treatment were elected by the LLC, then the owner avoids personal liability.

Single member LLCs should factor the added potential liability of federal payroll taxes when selecting their business form.