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The IRS recognizes the default business format for Multi Member LLC is a Partnership for tax purposes. As a result of such classification, each partner, otherwise known as member, is required to declare revenue allocated from the business on the member’s individual tax return 1040, SE, while the LLC itself follow 1065, Schedule C (if taxes as partnership, in most cases).

Social security and Medicare: According to the IRS official website, the tax rate for Self Employed person for social security and Medicare taxes is currently 15.3%, on the first $106,000 income. A member/ owner who work in the limited liability company is recognized as self employed. Therefore, the member will pay social security and Medicare through taxes.

W2 employees and LLC: If LLC taxed as partnership for tax purposes then members, who work for the business could not be W2 employees. In order to employ a member, the LLC could establish Guarantee Payment, where a member receive fixed amount of money (salary) regardless of the business final revenue or loss. The company’s net income (or loss) as it declared for tax purposes would be total EBIT minus the guarantee payment.

Distributions from the LLC: 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.).

By: Oren Gulasa

Basics of Taxations: The U.S. tax law has been revised many times in the last 20 years. Changes have occurred mainly in the private section and the most recent revision is the tax reform act of 1996. After the year of 2000, most revision to the tax law were due to different economic reasons.

The individual tax was reduced in 1986 to two basic brackets 15% and 28% with an intermittent rate of 33% for a certain mid-level income. When a person earns a lower level of income of $17,851, the individual would pay only 28%. At the same time, people with higher income would pay more, as it introduced in the progressive tax system and known as the Omnibus Budget Reconciliation Act of 1993.

Since 1993, changes in individual tax law affected the tax brackets. Politicians have a constant disagreement on the different tax variables such as personal exemptions. In 1996 following basic personal deductions are as the following: Head of household $7,550.

Married taxpayers filing jointly and qualifying widow: $10,300

The table below present the marginal tax rate on individual taxpayer in the US, 2006:

By: Oren Gulasa. Notes from Finance: Business Types and Taxation methods by A. A. Groppeli, PhD.