From a legal perspective, there are no "partners" in an LLC, only owners, or "members." State laws differ, but in almost all jurisdictions, members, like partners in a standard partnership, cannot be W-2 employees. Most states specify that members will receive their proportionate share of LLC profits, as stated in the company's operating agreement. These profits -- or losses -- are treated as personal income on the appropriate partnership distribution forms.
Fit your business needs with the right LLC package
LLC Members Are Seldom Employees
Unlike corporations, which can have any number of employees who are also owners -- by buying stock in the company -- LLCs are treated differently. These business structures, like partnerships, are "pass through" organizations, paying no income taxes themselves. All profits pass through the company to the individual members. While an LLC can have employees, members must perform direct and consistent management services to receive the additional status of employees.
Theoretically, LLC members cannot be classified as employees as a method to minimize self-employment taxes. While "fictitious names," like those used for DBA -- doing business as -- designations can be used, fictitious jobs cannot be created to save personal self-employment taxation. Should you hire a professional manager or other non-member employees, you can pay salaries and payroll taxes. However, members, often even managing members, are taxed as the LLC chooses -- partnership or corporation owners.
LLCs are not specifically recognized for separate taxation by the IRS, and can choose to be taxed in three basic ways. Single-member LLCs can be taxed as sole-proprietorships -- called "disregarded" entities -- or corporations. Multi-member LLCs can select to be taxed as partnerships or corporations. If corporation taxation is selected, LLCs have a wider latitude to have employees, even members. LLCs treated as corporations have wider latitude to employ members as employees.
Since LLCs are "creatures" of the state and not the federal government, your state regulations govern your options to treat one or more members as employees. In all cases, even if permitted to have members serve as employees, owners must provide useful and consistent services contributing to the operation of the LLC. Stay current with your state regulations, as legislation can change annually. Just as many large organizations prefer the "corporate-friendly" regulations of Delaware and Nevada, you might be in a state that is LLC-friendly. You must work within the LLC regulations of your state, which may or may not allow you to have one or more member-employees.