Are Members of an LLC Subject to Self Employment Tax?

By Jeff Franco J.D./M.A./M.B.A.

The Internal Revenue Service requires all taxpayers to contribute to the Social Security and Medicare system through employment taxes. Employed taxpayers have these amounts deducted from paychecks. Members of an LLC who do not have employment taxes paid on their behalf are responsible for remitting self-employment tax payments to the IRS.

The Internal Revenue Service requires all taxpayers to contribute to the Social Security and Medicare system through employment taxes. Employed taxpayers have these amounts deducted from paychecks. Members of an LLC who do not have employment taxes paid on their behalf are responsible for remitting self-employment tax payments to the IRS.

Who Must Pay

Members of an LLC that treat the business as a sole proprietorship or partnership for tax purposes are considered self-employed by the IRS, and are solely responsible for making employment tax payments from LLC earnings. If you are a member of an LLC that is subject to corporate tax treatment, you are not responsible for remitting employment tax payments. Members who are on the payroll of a corporate LLC have amounts withheld from wages to pay employment taxes.

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Net Earnings

The amount of employment tax you owe each year directly relates to the net earnings you receive from the LLC’s business activities. You must pay 12.4 percent of net earnings towards Social Security and 2.9 percent towards Medicare. However, only the first $106,800 of combined net earnings from the LLC and other sources is subject to the tax. Any amount you earn in excess of $106,800 is not subject to self-employment tax. Net earnings are the net profits you receive after reducing gross revenue by all allowable business expense deductions.

Optional Method

In tax years that the LLC generates either a small net loss or minimal net earnings, you may be able to use the optional method for calculating net earnings if you wish to receive credit for social security benefits that year. Eligibility to use the optional method requires that your share of LLC earnings are at least $400 in two of the last three tax years, and that you have not used the optional method calculation in more than four prior tax years. Additionally, the actual net earnings you receive from the LLC must be less than $4,721 and less than 72.189 percent of gross earnings. Gross earnings is all revenue before you take into account allowable business deductions. If gross LLC earnings are less than $6,540, then for purposes of self-employment taxes, net earnings is equal to two-thirds of the gross amount. If gross earnings are more than $6,540, the net earnings subject to self-employment tax is fixed at $4,360. If the optional method results in a net earnings figure that is less than your actual net earnings, you must use actual net earnings.

Reporting

The IRS requires all self-employed LLC members to calculate the net earnings subject to employment taxes on the Schedule SE attachment to IRS Form 1040. You can deduct 50 percent of the employment taxes you are liable for on the first page of Form 1040.

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