Can LLC Members Take a Salary?

By Cindy DeRuyter, J.D.

Can LLC Members Take a Salary?

By Cindy DeRuyter, J.D.

Members of a limited liability company (LLC) taxed as a pass-through entity receive business profits and losses in direct proportion to their share of ownership. The LLC's operating agreement establishes those ownership rights. LLC members often play key roles in the day-to-day management and operations of their businesses and may want to receive additional compensation in the form of a salary. In some limited circumstances, members may take a salary or receive other guaranteed payments from an LLC.

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LLCs Taxed as Corporations

Under the default pass-through entity framework, LLC members must report their proportionate share of profits on their individual income tax returns each year, whether or not they actually received distributed profits. Members can receive "draws," representing their share of earnings, from the profits throughout the year.

For pass-through business entities, each member is responsible for paying self-employment tax on those earnings, as the business does not pay any income tax or withhold Social Security or Medicare taxes on those profits. LLCs taxed in this way, as partnerships, may not pay salaries to members. The same is true for a single-member LLC whose earnings and expenses are also passed through to the sole owner and are taxed in the same way as a sole proprietorship.

However, LLCs can also choose corporate taxation. If an LLC has elected S corporation or C corporation tax treatment, then owners may also be employees of the LLC and earn reasonable compensation as salaries. As with any other employee's paycheck, the LLC would be responsible for withholding federal income taxes, state income taxes, and Federal Insurance Contributions Act (FICA) taxes, which fund federal programs including Social Security and Medicare. A single-member LLC could also elect corporate tax treatment, in which case the business could pay a salary to its sole owner.

Guaranteed Payments

LLC members, even those in pass-through entities, may also be able to choose to receive guaranteed payments from the LLC. Guaranteed payments represent fixed amounts paid to members, regardless of how much profit the LLC made in a given time period. Like salaries, these types of payments are generally tax deductible for the LLC, assuming the arrangement meets Internal Revenue Service requirements. This means those payments reduce the net profit members earn in their capacities as members.

As with other income, members are responsible for self-employment tax on guaranteed payments. There can be other potential ramifications for guaranteed payments when it comes to members' capital accounts in the LLC. It is important to be aware of these before structuring a compensation arrangement for members.

When to Consult a Tax Professional

There could be many reasons an LLC member may want to receive a steady paycheck, regardless of how well or poorly the LLC is actually doing. Choosing to be compensated through a salary arrangement, rather than receiving guaranteed payments or other distributions, could also significantly impact an LLC member's personal income tax liability.

Talking to a business and tax attorney, a CPA, or another tax professional can help LLC members understand the potential benefits or drawbacks of various compensation arrangements.

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