Members as Employees of LLCs: Using Tiered LLCs, Separate S Corporations, and Leasing Companies to Pay Owners

Partnerships, including LLCs taxable as partnerships, often choose to grant ownership interests to individuals who provide services to the entity. A long-standing IRS ruling dictates that a partner who is paid compensation for services to a partnership cannot receive a W-2 for wages and is not eligible for certain employee fringe benefits. Although compensation for services paid to members of LLCs generally must be treated as guaranteed payments, subject to self-employment tax (but not withholding), some LLCs may be improperly reporting these payments as wages (subject to withholding).

An attempt to treat compensation payments by an LLC to a member as wages comes with risks. For example, because the member is responsible for self-employment taxes, payment of the employer portion of any FICA taxes may be characterized as additional compensation to the member (subject to additional income and self-employment tax). Further, any reported exclusion from a member's income of amounts paid in connection with the member's participation in a Section 125 cafeteria plan could be disallowed and treated as additional compensation to the member.

Alternative structures may be available that allow an LLC to treat an owner as an employee receiving wages and entitled to employee fringe benefits. Tax practitioners working with entities taxable as partnerships, including LLCs, should understand these potential structuring options.

Listen as our panel of partnership taxation experts explains how an LLC may be able to treat an owner as an employee for tax purposes.

1. Withholding for employees
2. Guaranteed payments to members
3. Potential consequences of incorrect treatment
4. Employee leasing companies
5. Separate S corporations
6. Tiered LLCs
7. Pros and cons of alternatives
8. Employee fringe benefit consideration

The panel will cover these and other critical issues:

• Guaranteed payments to members
• Potential consequences of incorrect treatment
• Alternatives to permit employee treatment of LLC owners
• Employee fringe benefit consideration

Learning Objectives

After completing this course, you will be able to:

• Understand who is responsible for employer withholdings and estimated payments.

• Recognize the tax consequences of guaranteed payments.

• Determine how tiered LLCs, separate S corps, and leasing companies can be used to pay entity owners.

• Establish the risk of misclassifying a partner.

• Ascertain the potential impact of guaranteed payments on fringe benefits.

• Select the best structuring options so that partners may receive guaranteed payments.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).