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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