TaxMamas TaxQuips

Today we hear from Dave in Idaho who tells us, “Some of my friends have a rather successful business formed as an LLC. Their CPA told them that they could file as a partnership and not report any self-employment income, even though they are all actively working in their business. Is this true? And where can I find information to show them they what the law says?”

Dear Dave,

In a word. No. They can’t file as a partnership without also being subject to self-employment (SE) taxes if they are actively working in and running the business.

There are a couple of ways to get around the SE tax issue.

1) File the LLC as an S Corp. There’s no SE tax on the pass-through income. However, as an S Corp, they must take reasonable compensation and be on payroll, just like any other employee.

2) If they want to file their LLC as a partnership, then everyone who is actively working in the business gets SE taxable income. HOWEVER, they are allowed to own different batches of the LLC shares, which are different classes of the LLC. They could have limited ownership, and just be an investor for some of those shares. Other shares will be their active shares as managing partners.

Where can you learn the rules and options for LLCs? Hmmm…

IRS LLC Resource
http://www.irs.gov/businesses/small/article/0,,id=98277,00.html

Tax Issues for Limited Liability Companies.
http://www.irs.gov/pub/irs-pdf/p3402.pdf

Your best bet, though, is to search CCH for their LLC guides. Though you will have to pay for this information.
http://tax.cchgroup.com

And remember, you can find answers to all kinds of questions about LLCs and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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