Pay for LLC member

Has the LLC elected to be taxed as a corporation? If not, then no.

"If not, then no," says ArtK. And I say: "Show me."

I would hope that *if the relationship between the LLC and the person who's managing it is that of employer-employee* that the manager would be "paid as an employee" and would get a W-2. He might not be eligible for some tax-advantaged fringe benefits, however, because of his membership in the LLC.

It's because if the LLC is taxed at the default setting, i.e. partnership, partners do not received W2's. Neither would a single member in an LLC taxed as a proprietorship.

Therefore, only an LLC taxed as a corporation would issue a W2 to a member.

I thought that had been settled long ago.

ChEAr$, Harlan Lunsford, EA n LA

"LoTax" wrote

If you are looking for how to treat payment for services to the partner for managing, it's handled as a "Guaranteed Payment to Partner" in most cases. Still, a W-2 is not issued, as those payments are reported on that specific partner's K-1.

If a person is working as an employee of a partnership, he gets a W-2 that reports the compensation he receives as an employee. If he's also a partner in the partnership, he still gets a W-2 for the work that he's doing as an employee of the partnership. Am I wrong?

Since he is the managing partner, and this is a partnership for tax purposes, he is a non-employee and his income is reported on his K-1.

He does not hold a common-law employer-employee relationship.

If he was not a partner a but a completely disinterested manager, you would be right.

I hope you don't have this situation, which would need amending.

No but it would be unusual to pay a managing partner as an employee for his performance of his core duties as a partner, and it might even be challenged.

It would be less unusual to construe the payments as guaranteed payments (this is really up to the partners and their agreement), and this would have the advantage that you do not pay FUTA and SDI, and your qualified plan options are richer, and are easier to set up.

Generally you're entering in a partnership relationships because the parties do not want to enter into an employer/employee relationship so I suspect this does not come up very often.

Steve

I just HAVE to ask, where did you learn income taxes?

Sorry, this is not meant to be confrontational, but we all on this board try to do the right thing , and to answer questions correctly.

ChEAr$, Harlan Lunsford, EA in LA

Art, Harland, Paul & Steve are right on the money with this. A general partner in a partnership does NOT get a W-2, he gets guaranteed payments.

Now a LIMITED PARTNER in a general partnership who works for the company BUT has NO INPUT into management decisions CAN get a W-2 - I've seen this once or twice in 30 years.

That's what the rule books say . . . But wait, there's more!

Since 1998 there has been some controversy over whether LLC members are subject to SE tax on ALL of their distributive income. The IRS first said YES - its all subject to SE tax just like a general partnership. The People rose up and pressured Congress which ordered the IRS to back off until they (Congress) formally addressed the issue - which they have yet to do officially.

This leaves us with three possibilities - and the answer you get will depend on who you talk to -

Option 1 - all distributive income to an LLC member is subject to SE tax and they are treated just like a general partner in a partnership.

Option 2 - Since they are LIMITED members they are treated like limited partners and NONE of their distributive income is subject to SE tax.

Option 3 - make a good faith allocation of distributive income between guaranteed payments, subject to SE tax, and distributive payments NOT subject to SE tax.

This brings us to MY question -

IF (and that is a BIG IF) you take the position that an LLC member is to be treated like a limited partner in a partnership, where NONE of their income is subject to SE tax, should you (could you or would you) then put that member on W-2 payroll?

I know what my position is, but I'm curious what the Tax Gang thinks (betcha y'all thought I'd forgotten about the Tax Gang - haven't heard them mentioned lately).

For my money, I'd never put an LLC member on a W-2. It doesn't feel right to me, but I'm a traditionalist. However, I know quite a few accountants, whom I think highly of, who don't like it but let it slide since the IRS doesn't seem to care.

Gene E. Utterback, EA, RFC, ABA

(a whole bunch snipped here for brevity.....!!!!)

Well I'll mention the Tax Gang again. Now I know you weren't at the first ever Tax Gang convention in St Louis, but if you'd like a group picture, just let me know and I'll email you one.

Now, back to taxes.

ChEAr$, Harlan

without the necessity of a general partner - i.e. no personal liability for LLC debts for any individual.

As far as control goes, the LLC manager is equivalent to a general partner. But he's also equivalent to the president of a corporation. The president is simply an employee. The complicating factor is that corporations are specifically dealt with in the tax code, but LLC's arent.

Personally I'd like to see the test based on the LLC operating agreement, to determine if payments are more in the nature of wages or something else. That might be too nuanced under the circumstances, though.

I'd certainly put those who aren't managing member on payroll. I think that would be proper for the manager as well, but I wouldn't object strenuously if the IRS claimed the rule was otherwise.

"Gene E. Utterback, EA, RFC, ABA" wrote

I think I've seen their gang "tag" around town lately.

No, that's the "Tax and Spend" gang, currently lobbying for passing local options sales tax for schools, at least down here in Columbus, GA

ChEAr$, Harlan

So, my buddy worked for Borden Chemicals several years ago. He was a night-shift assistant supervisor which means he swabbed the floors between shifts. Turns out, Borden Chemicals is a publicly-traded partnership, and was listed on the NYSE. And it turns out my buddy bought a hundred "shares" of Borden in the stock market. He's now a partner in the partnership that employs him. Do his wages suddenly become a guaranteed payment, and does he suddenly no longer get a W-2 for them? Am I still wrong? Where is the dividing line between my buddy's situation at Borden Chemicals and the *absolute* rule (that no one has been able to give an authoritative cite for) that partners **always** get guaranteed payments, and **never** get a W-2?

OP stated this person was a managing partner. I deduce from this he was a general partner. Your friend was a limitd partner, and as a previous post indicated, it can be the case that a small, limited partner can be an employee.

It is rare to see questions asked in this board or many other tax boards about individuals who are limited partners.

When I took the course on taxation of entities, the professor intimated that the two lectures on partnerships were not nearly the whole story, as partnerships are supremely more intricate that C or S corps, and to learn more of the full story you need to take a whole entire semester course on partnerships.

I believe him.

Steve

And to THINK that I have always been agin partnerships for business purposes just because I knew they were short term affairs and usually always fizzled out in about a year or less.

You know, sort of like marriages.

ChEAr$, Harlan Lunsford, EA n LA

so, was this the Borden Chemicals and Plastics, LLP, of Louisiana which went under in 2002?

ChEAr$, Harlan Lunsford, EA n LA