I am a member of an LLC which has four members. We also have
4 additional fulltime employees. Each member equally owns
25% of the LLC. We used to only take draws, but this past year, we instead gave ourselves 'salaries' each month. Anything excess profit would then be a member draw each month. Is it perfectly legal with the IRS that a certain LLC member was paid a significantly higher salary than the others? Basically, what i'm asking is: Is it okay for some LLC members to get a higher salary than other equal members? The only equal draws at the end of it all is just the excess profit that remains. Thanks, Mike
Certainly, BUT the likelihood is that you should have been paying yourselves wages from the gitgo if you were organized as a corporation!! Under a partnership agreement, guaranteed payments could be set up to accomodate a higher "take" on the part of individual partners. If you are partners, wages/salary would not be the proper form.
Well, yes, but assuming your LLC has not elected to be taxed as a C corporation, the LLC members cannot be employees. The LLC has to follow the partnership rules. The members will be taxable on their distributive shares of the partnership's income (BEFORE their "draws"), regardless of how much cash they actually took out of it. If a member took more cash than his or her distributive share of income, the excess reduces his or her basis in the LLC. The correct way to handle this in a partnership is to make "guaranteed payments" to the members based on the compensation they would receive if they were employees. So member A might work half time or at a job that would earn a lower wage rate and get a $50,000 guaranteed payment, while member B works full time or has skills that would be highly compensated, and gets a $100,000 guaranteed payment. The guaranteed payments are subtracted from the partnership's income, and the remainder is divided among the partners in accordance with their P&L interests. So, suppose you have four members, A, B, C, and D, each with a 25% P&L interest in the LLC. The net income of the partnership, after deducting other expenses (such as employees' salaries), is $550,000. A gets a $50,000 guaranteed payment; B gets $100,000 guaranteed payment; C and D do not perform services for the LLC. A's K-1 shows $100,000 (550,000-150,000 = 400,000 x 25%) distributable income, plus $50,000 guaranteed payment. B's shows $100,000 distributive share plus $100,000 guaranteed payment. C and D each get $100,000 distributive share. Katie in San Diego
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