Our first #AskVic question is, can a member of an LLC receive a salary for their services? A Limited Liability Company (LLC) is an entity type that is formed at the State level. If the LLC has only one member, then it is called a single member LLC (SMLLC), which is a "disregarded entity," meaning that the Internal Revenue Service (IRS) does not recognize it as a separate entity, and the member would need to file a Schedule C on their personal tax return to report the income and expense activity of the SMLLC. On the other hand, if you have a multi-member LLC, meaning you have more than one member, then you have a couple of options in regards to how you want to be treated by the IRS. The IRS by default, treats a multi-member LLC as a partnership, and therefore they would file a form 1065 to report the income and expense activity and issue K-1's to the members. However, the members can elect to treat their LLC as an S Corporation, by timely filing form 8832.
Now that we have an understanding of how LLCs operate, we can determine if members/owners can receive a salary. If your LLC is either a single-member LLC or treated as a partnership, then the owners cannot pay themselves salaries or wages. If you are an SMLLC, then any payments made to you, would be treated as distributions/draws, and you would pay self-employment taxes on the profit generated at the end of the year. If you are a multi-member LLC, then the partners would all receive K-1s at the end of the year, which would show their pro-rata share of the profit, credits and other deductions allocated to them. The owners would generally pay self-employment taxes on their pro-rata share of the LLCs profit. Per the IRS, partners of partnerships are not employees and should not be issued a Form W-2.
Generally any payments made to partners for services provided are treated as "guaranteed payments," and are shown on the K-1 along with their pro-rata share of the profit. Members pay self-employment tax on any guaranteed payments that they receive from the partnership.
In order to be paid a salary from the LLC, you would need to file a timely election to be treated as an S Corporation. The IRS has different rules that apply to S Corporations, however electing your LLC to be treated as an S Corporation will allow you to be treated as an employee of the company and get paid a salary.
Always consult with your tax professional before you begin any new business endeavors, so that you can work on developing a strategy to minimize your taxes.
Further reading: http://www.journalofaccountancy.com/issues/2014/aug/20149676.html
Source: Internal Revenue Service
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