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LLC OWNERS RESPONSIBLE FOR PAYROLL TAXES? NO SURPRISE.

May 30, 2007

The Instapundit makes a rare venture into the tax law with this post, repeated in its entirety:

BIG -- AND POTENTIALLY BAD -- tax news for LLCs.

He links to an article headlined Limited Liability Company owner IS Liable for Payroll Taxes - This is BIG, that reads:

The 2nd Circuit Court of Appeals in McNamee v. IRS, No. 05-6151 just affirmed a federal trial court's determination that the owner of an LLC (limited liability company) can be held personally liable for unpaid payroll taxes. This is a significant decision, which may well be appealed to the Supreme Court.

Big? Not really. It would have been much more surprising if the court had ruled otherwise.

The regulation that governs the taxation of LLCs reads:

...an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.

If an entity is "disregarded as an entity separate from its owner," it's treated for tax purposes as if it's not there. It would be stunning if the courts had read this to mean "disregarded except for actually paying taxes."

As pointed out in the post linked by Instapundit, it usually doesn't matter anyway. Even the owner of a corporation will be on the hook if he chooses not to fork over payroll taxes withheld from employees; failure to remit payroll taxes is the most common source of tax ruin for small businesses.

The moral? Never, ever fail to remit your payroll taxes; if you do, don't expect an LLC, or any other entity for that matter, will fend off the IRS.

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