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Discussion Forum Index --> Consumer Questions --> LLC Owners that are employees-payroll?


Kim-inAZ (talk|edits) said:

24 June 2007
hi, I have a small business that has 3 equal partners in a multi member LLC. We will all be working for the business providing a service. do we all go on payroll or do we all draw from the business.

please help. thanks

Solomon (talk|edits) said:

24 June 2007
LLC Issues.

JR1 (talk|edits) said:

June 24, 2007
No payroll. Guaranteed payments. No payroll filings, you pay your SE/SS taxes on your 1040's along with all your other taxes.

Kevinh5 (talk|edits) said:

24 June 2007
JR1, you are assuming they accept the default tax classification and didn't check the "stupid" box. If they checked the "stupid" box, they need to pay payroll.

Kim-inAZ (talk|edits) said:

24 June 2007
i'm sorry- We are new to this. What is the "stupid" box. Our business isn't quite open yet (in 2 weeks)and we haven't started a draw or payroll yet? So, JR1 are you saying that even though we are employeed owners we should be filing as independant contractors OR self-employeement. I'm confused over the form -(among many other things, obvisously!!)you said 1040, so no 1099-M?

PLEASE BEAR WITH ME--THANKS SO MUCH. All input very much welcome! kim

Solomon (talk|edits) said:

24 June 2007
File as a partnership using form 1065 with K-1 going to each partner. I believe the stupid box would be on form 8832 (an election to file as a corporation). By default you will file a 1065. Each partner will pay SE tax on his SE income from the K-1 - it is reported on each of their 1040's. Sounds like you should visit a professional tax preparer.

TexCPA (talk|edits) said:

24 June 2007
JR1 can you confirm please?

However it is my understanding that instead of filing Form 8832, an LLC can file form 2553 and be a LLC taxed as an S-corp and thus pay a 'reasonable salary' to the 'owner employees' and file an annual Form 1120-S

Thanks !

TexCPA

Blrgcpa (talk|edits) said:

24 June 2007
If the LLC elects to file as a partnership, the members do not get a salary. They get a guaranteed payment. Each member is resposible for their own taxes. They would have to pay estimated taxes that would cover income taxes, and both parts of the fica and medicare tax.

If the LLC elects to be taxed as a corp, then each member would be on p/r. All required p/r taxes w/b w/h. The entity would also need to pay futa and state unemployment as well as w/c and dbl.

You would set up p/r accts with both the IRS and the state.


  • The following posts on related topics have been moved from a discussion on the pro tax forum:


Tkspann (talk|edits) said:

29 May 2007
Related question: Does everyone who owns shares in an LLC need to be treated as a partner (and get guaranteed payments instead of W-2 wages)? I would like to give everyone in my new company some equity in the company, but it seems I'm creating a nightmare of SE taxes. Is there any way to give a small amount of equity to people without moving their pay to guaranteed payments?

Thanks!

Kevinh5 (talk|edits) said:

29 May 2007
TKS, how is the LLC taxed? 1120-C, 1120-S, 1065?

KatieJ (talk|edits) said:

29 May 2007
If the LLC is taxed as a partnership, all of its members (owners) are partners for income tax purposes and CANNOT be W-2 employees. So no, there is no way to give an LLC's employees equity without making them subject to the partnership rules (unless the LLC elects to be taxed as a corporation). As noted above, it appears that under current authority (or, more accurately, the lack thereof) those members who perform services for the LLC can be given guaranteed payments in lieu of wages, which would be subject to SE tax. Their distributive shares of net income (calculated after deducting guaranteed payments) arguably would not be subject to SE tax, as long as the guaranteed payment represents reasonable compensation for the services they provide. This is the way it is done for S corporations, except that in an S corporation, the stockholder/employee receives a W-2 rather than a guaranteed payment. The principle ought to be the same, as JR1 suggests. At least, we think so <G>.

There are some other considerations you (and your employees) might want to look into. For example, converting employees to LLC members may jeopardize or limit their rights to claim workers compensation or unemployment benefits. If you are in a state that provides state disability insurance (CA, NJ, a handful of others), partners may not be eligible for benefits under that program. In general, employees have certain rights under state law that may or may not be available to LLC members who are treated as partners for tax purposes.

Robzebr (talk|edits) said:

10 August 2007
Robz's multiple postings of the same question were consolidated here: Discussion:Single Member LLC payment for services rendered.

Webscapes (talk|edits) said:

15 October 2007
I would like to know if you got an answer to the above question. We are in the same boat. My husband, use to be a sole proprietor, now an LLC and wanting to make our son a member. However, my husband would be 99% owner, and our son 1% owner. We'd like to pay our son, but not sure how to set it up. We'd like to compensate him for what we were paying him before as an employee, perhaps giving him a small percentage of the profits, but we'd still make the majority of the income. Right now, he just takes a draw as he needs money. Any suggestions how to handle this to keep it simple? What should we put in our operating agreement then?

Kevinh5 (talk|edits) said:

15 October 2007
did you check any box to be taxed a certain way, Web?

Webscapes (talk|edits) said:

16 October 2007
Not sure what you mean by checking the box. We just applied to become a LLC from a sole proprietorship and now we'd like to add our son as a member to help reduce the cost of workmens comp insuranc.

TheTinCook (talk|edits) said:

16 October 2007
You didn't check the box! :O

Image:Checktheboxsmall.JPG

Jdugancpa (talk|edits) said:

16 October 2007
"If your friends all jumped of a bridge, are you going to do that too??" (Parent's retort)  :)

Web, you probably should see a tax professional for advice. Right now it appears you have not "checked the box" to be taxed like anything and therefore you will fall into the default which means the LLC will be taxed just like a sole proprietorship. But if you make your son a member of the LLC you will no longer be a Single Member LLC (SMLLC). The default for a multi-member LLC (MMLLC) is a partnership and you will then have to file a partnership tax return (Form 1065). You should consult with someone to guide you through this maze.

Webscapes (talk|edits) said:

17 October 2007
Need advice on how to set up a LLC for my husband and son. We did this to make our son a member to keep our payroll down for workmen's comp fees. However, how do we decide guranteed payments? He only works for the company and does not put in any capital, etc. We'd love some ideas how to set this up the correct way. We'd like to give him a weekly amount of pay or income and perhaps a small percentage of the profits, but don't know how to set this up. Now I'm wondering after reading all the articles if we should file as an S corp to be able to give him a basic salary instead and he would be considered an officer, which would be excluded for workmens comp insurance. Thanks for any advice you might have for us.

Kevinh5 (talk|edits) said:

17 October 2007
Web, you asked this question here less than 24 hours ago. I suggest going back and reading the responses rather than asking again.

And if you want specific advice, you may want to hire a specific tax professional, rather than receiving generic info from a web discussion board for tax professionals to discuss tax issues.

Jmd (talk|edits) said:

20 December 2007
What can and should be done in the case where a LLC, taxed as a partnership, that has used the services of a payroll service provider throughout the year, and the FICA (self employment tax) related to the managing member's guaranteed payment has been recorded and remitted to the government by the payroll service in the very same fashion as for the LLC's FICA for its employee (a non-member) via form 941? With year-end a week away, can the managing member write a check to the LLC to cover the FICA payments that have been remitted on his behalf as shown on the Form 941? Or if the LLc members are in agreement that the managing member's guaranteed payment recorded through the third-party payroll service can be grossed=up to cover the employer portion of FICA? Since the managing partners FICA tax withholding has been done through a payroll service verses individually remitting quarterly payments, can the payroll service be instructed to not report the managing partner's guaranteed payments on a W-2?

Jdugancpa (talk|edits) said:

20 December 2007
The previous quarters' 941's will need to be amended to remove gross wages of LLC members as well as all of the FWT and FICA for the members. Amending will generate refund to LLC. Member will need to make estimated tax deposit and, unfortunately the deposit will be late. My guess is that you will be able to obtain waiver of penalties, but not of the interest. I know of no way to transfer the PR tax deposit refunds from the LLC to the member to alleviate the penalties. But maybe someone here does.

Jmd (talk|edits) said:

21 December 2007
Thanks for the input Jdugancpa. I'm disappointed that the payroll service didn't catch this from the start; I guess we should have involved a practicing CPA and not assumed a payroll service knows what questions to ask.

One further question; if the managing member of the LLC takes distributions in addition to his/her reasonable compensation, are the distributions (profits) subject to FICA also?

Jdugancpa (talk|edits) said:

21 December 2007
Distributions from a MMLLC (multi-member LLC) taxed as a partnership are not taxable. The member will be taxed on the allocated earnings from the LLC without regard to whether or not it is distributed. Generally all the earnings allocated to an LLC member will be subject to SE tax which is the equivalent of FICA tax, except it is paid 100% by individual instead of 50% by individual and 50% by ER(there are some arguments against this that I will not go into here, but you can do a search on "SE tax LLC"). (Self-employed individual is simultaneously the EE and ER.)

BudClem (talk|edits) said:

23 December 2007
I have registered a LLC and wanting to make our sons members. Husband would be 60% owner, wife 20%, son1 10%, and son2 10%owners. We'd like to pay our sons, but not sure how to set it up. We'd like to compensate them and provide them a percentage of the profits. Any suggestions how to handle this to keep it simple? What should we put in our operating agreement,if the parents are funding the franchise which the LLC will acquire (a promissory note for repay over time?) Parents need to have some income from the franchise, yet all capital hungup in startup. How does all the employees get paid or gain income to affort personal expenses?


Bobbinoc (talk|edits) said:

7 September 2008
My wife and I formed an LLC which we used to purchase a retail business. We elected to be taxed as a partnership. My wife is actually running the business and working there everyday. I want to pay her and I need to clarify how to do that. It is my understanding that whe cannot be paid w-2 wages, but must be paid guaranteed payments. Can we also draw on capital as an alternative? Are these the only methods to compensate her? Also, I was reading about funding the business with a loan to the LLC rather than a captial conribution. Could we loan the llc the amount we would otherwise contribute as capital and have the LLC make payments and use this to compensate her? Wouldn't this avoid SE tax altogether? I would be interested to hear any other options.

Ms6550 (talk|edits) said:

8 September 2008
My understanding is that SE tax would be on GP only and not on the distributive net income. Establishing the salary (GP) leaves the balance not subject to SE tax. Similar to a w-2 wage to an 1120S shareholder and the balance coming out as dividend distributions


Ell (talk|edits) said:

23 August 2009
I'd like to see the LLC operating agreement without triggering a frivalous lawsuit. Suggestions?


  • The following posts have been moved from a different tax pro forum discussion:

RouxGumbo (talk|edits) said:

21 June 2010
I have read these posts and see that there are various theories and outlooks.

Can a partner do the K1 in FY08, and then opt to receive a 1099 in FY09? The business is a LLC

DZCPA (talk|edits) said:

25 June 2010
LLC are partnerships. It is no different.


  • And from another:

Jr619e (talk|edits) said:

8 May 2008
So, here's another "not so hypothetical" question, tangential to the topic:

I understand the discussion regarding Service Partner income, etc. However, can a Member of a multi-member LLC also simultaneously be an employee? I see this constantly....the Operating Agreement authorizes an executive committee...President, VP/Sales, etc. Can a Capital Member simultaneously hold one of these positions..........as an employee, and be paid a salary under an employment agreement with the LLC? Or, can a Member only take distributions.

jre

Wwtaxes (talk|edits) said:

9 May 2008
How is the MMLLC taxed - as a partnership or as a Corp?

RoyDaleOne (talk|edits) said:

9 May 2008
If a member of an LLC is an employee, the member is an employee.

Employer-employee is a relationship, and that relationship is defined by law.

See: Sec. 3121

Titles per se do not make a person an employee, it is the rendering of services as an employee to an employer that makes a person an employee. If, such a relationship exists, employer-employee, between the LLC and the member, I would suggest that the member is, in addition to being a member, is also, an employee.

For Federal payroll tax purposes, however, generally speaking, partners (or LLC members) are not employees, and sole proprietors should never be an employee.

The default taxation of an MMLLC is as a partnership.

Jr619e (talk|edits) said:

9 May 2008
The LLC is taxed as a partnership.

Obviously, many LLCs are formed where funding comes from one of the members......while the other contributes his/her time and needs to get paid. So, for example, the investor-Member contributes 100 K, the non-investor member contributes Services (perhaps writes software). Each holds a 50% Capital and Profits interest. LLC is taxed as partnership. The LLC is a startup......no real revenues for months or longer.

How does the LLC compensate the non-investor member....so that he/she can live during the startup phase?

Jr619e (talk|edits) said:

9 May 2008
To be clear, I want to understand:

1. how best to compensate the non-investor "services" contributer 2. how to structure the 50% Profits/Capital Interest of that member in such as way as to preclude his initial 50% Capital/Profits interest (in exchange for his software-writing services) from being construed as taxable....as FTF65 stated it would be (see Jan5 post) in his "next-day dissolution scenario." I would prefer that the structure not involve a vesting period.......unless there's no other way to do it.

RoyDaleOne (talk|edits) said:

9 May 2008
Jr619e I suggest you get help from someone that is a professional in this area.

Because, your statements as to 50% Capital/Profits interest, etc. show that a deeper understanding of the objectives of the client is needed, and to couple that, with an understanding the relative internal revenue code, to achieve the objectives of the client.

Wwtaxes (talk|edits) said:

9 May 2008
The reason I asked how the LLC was taxed is that I thought partners in a partnership couldn't be employees and that they had to receive guaranteed payments instead of a W2. The rest of the issue is much more complex and I agree with RDO about seeking help. In particular, I would be careful to define not only vesting periods, but ending periods. For example, if 2 people partner, one puts up $NN and the other contributes sweat equity, at some point the sweat equity will likely exceed the value of the $NN. I've seen agreements go sour because they never thought about this.

Jr619e (talk|edits) said:

9 May 2008
The clients' goals are straightforward:

1. build a successful software company, as equal partners, by combining the financial wherewithall of one partner (100K Contribution to the LLC), with the technical/product skills of the other partner (who has no money and needs an income while the product is being developed).

This scenario is very common.....but often done wrong even by those purporting to understand the various tax and entity issues. I'm just looking for a perspective on a way to make this work for both of them....

JayRichardson (talk|edits) said:

19 May 2008
A great discussion: but I have one question...if A and B form an LLC and A puts in $50,000 cash and B puts in services that both agree are 'worth' $50,000, then would you say that B's capital contribution is $50,000? I ask because I wonder can one use 'straight-up' income/loss allocation language in the LLC agreement for such situations?

Jr619e (talk|edits) said:

19 May 2008
As I understand the earlier discussions, the answer would be yes.

And, reading farther up the discussion ladder, the responders appear to be saying the following:

In the event that B's 50% capital interest (for, presumably, future services) was either: 1.) immediately vested, or:

2.) by right in any part payable to B, upon dissolution of the LLC (for instance, on the very next day with no intervening events) in cash from the funds contributed by A.....

then the value of his immediately vested and/or paid-out dissolution cash would be taxable as 1099 income.

Do I have that right, gentlemen?

AS5613 (talk|edits) said:

22 July 2009
I need to know how to record the equity in an LLC that is exactly what was described above. After reading the entire discussion I never read the actual answer of what to debit and what to credit. Partner A contributed 500,000, while Partner B is contributing expertise. It is immediately 100% vested. Upon dissolution partner A is to get his 500K back with interest. They are 50/50 partners for profit or loss.

JR1 (talk|edits) said:

July 22, 2009
It's not clear...is B getting a stake in the equity, too? Or just the P/L's?

Harry Boscoe (talk|edits) said:

23 July 2009
"Upon dissolution partner A is to get his 500K back with interest" sounds more like a loan than a capital contribution...

For the "contributed labor" Debit labor cost [maybe deductible, maybe capitalized] and Credit the capital account.

AS5613 (talk|edits) said:

23 July 2009
B gets just P/L. I forgot to mention that any distributions count toward that repayment of the 500K. There have been more than 3 million in distributions so partner B would not owe anything upon dissolution. They split the income 50/50 but partner A's capital is 500K greater than partner B's and they should be equal.

AS5613 (talk|edits) said:

23 July 2009
I am thinking Harry is right, I would debit a guaranteed payment expense and credit capital. Right?

Harry Boscoe (talk|edits) said:

23 July 2009
"I am thinking Harry is right..." Not if it's *only* the P&L that the partner is getting!

But what do you mean when you say " It is immediately 100% vested. "?

AS5613 (talk|edits) said:

23 July 2009
Meaning that the agreement has no waiting period for anything to take effect.

AS5613 (talk|edits) said:

23 July 2009
The agreement is partner A puts in the money and partner B puts in the expertise. The partnership is supposed to be valued at 50/50. Partner A should not have more capital than partner B. His expertise should be valued at 500K and put on the books, or partner A's 500K should not be put on the books.

Harry Boscoe (talk|edits) said:

23 July 2009
Then what do you mean when you write "B gets just P/L"?

AS5613 (talk|edits) said:

23 July 2009
I was incorrect. He is a full 50/50 partner in everything.

JR1 (talk|edits) said:

July 23, 2009
Well, that changes things doesn't it? Does B realize that he'd have 500k in income under this scenario? I'd suggest that A contributes 1000, B recognizes income of 1000, so there's your capital accounts, and A loans 499k.


Carmelhopeful (talk|edits) said:

5 January 2010
So, now that this has been beaten to death ~ I have a 70/30 LLC, where the 70% member A is contributing an intangible valued at $15,000 (in this case, software that he has written with a zero basis) in exchange for his 70% interest in capital and Profits/Losses, and the 30% member B is contributing cash of $3429 and property with FMV of $3000 (tax basis of $2500) for a total of $6429 for his 30% interest in capital and profits/losses. Would the proper recording on the partnership books to minimize income to either partner be to Debit Cash for $3429, Debit Assets for 3,000, Credit Accumulated Depreciation for $500, and credit Partner B Capital for $6429. Then, assuming that there is no entry to Intangibles for Partner A on the Partnership books, since he is contributing an "intangible with zero basis", there is no corresponding credit to Partner A's capital account either, and no "guaranteed payment for services to pick up"?

The partner's outside basis would be $0 for Partner A since he has never picked up any income from the intangible he created yet, and the Outside Basis for Partner B would be $6429? And then as a result, Partner A will be specially allocated any gain arising from the future "sale of that software" an amount equal to $15000, and the excess would be split 70/30 between the partners? And finally, I am unclear about the depreciation on the property contributed that now has a basis of $2500. Does the remaining depreciation of $2500 get allocated 70/30 to the partners, or should Partner B receive a special allocation of the depreciation on those assets until their value is zero since he is the one that contributed them? I do understand if the assets are sold at a gain, the original $500 in depreciation that partner B took before contributing to the partnership would be allocated to Partner B.

Carmelhopeful (talk|edits) said:

5 January 2010
IN first paragraph, I meant to say Credit Partner B Capital for $5929.


Hrblvr (talk|edits) said:

5 April 2010
when creating a quickbooks account for an LLC that has been in business for 4 years, what is the appropriate way to setup capital accounts when factoring in "sweat equity"? is it sensible to just enter the beginning balances with the monetary value of said sweat equity included? it has already been vested...or is that simplifying too much? am i still required to go through and debit GP and credit the members capital acct?

Wiles (talk|edits) said:

6 April 2010
Whenever I see the words "sweat equity", I immediately think 83(b) election.

Brooksite (talk|edits) said:

15 July 2010
When a person contributes services to a LLC in exchange for LLC units, the contributing member would submit an invoice at the fair market value of those services. The company would record the invoice to expense and accounts payable. When the units are issued to contributing member the offset would be to A/P and credit the capital account. The LLC would have recorded an expense and the contributing member would have a taxable transaction. Any differences in the basis of the LLC units and the invoice would create a write-off or forgiveness of debt.

Taxxy (talk|edits) said:

22 July 2010
My question does not concern recognition on contributing services, but what if a member is to grant a license to the LLC. Is this treated as contributing property and therfore a tax-free contribution? The contribution is for a membership interest.
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