Vision Payroll

This week’s question comes from Nikki, an LLC member. I am a member in an LLC. My neighbor is a member and receives a paycheck, but I’ve been told that I can’t receive a paycheck. Can an LLC member receive a paycheck from the LLC? Answer: For federal tax purposes, an LLC can make an election to be taxed in one of the following three ways:

• Sole proprietorship (if only one member in LLC)
• Partnership (if two members or more in LLC)
• Corporation (any number of members in LLC)

This election is generally made when the entity is formed and must be done by the time the entity files its first income tax return.

If your LLC has elected to be taxed as a sole proprietorship, the LLC cannot pay wages to the member and the member cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the LLC.

If your LLC has elected to be taxed as a partnership, the LLC cannot pay wages to the members and the members cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the LLC.

If your LLC has elected to be taxed as a corporation, the LLC can pay wages to the members and the members can have income tax, social security tax, and Medicare tax withheld, and can receive a Form W-2 from the LLC. This is true even if there is only a single member in the LLC.

As for LLCs that have elected to be taxed as a sole proprietorship or a partnership, members may receive a draw from the LLC and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.

This week’s question comes from Carl, a partner in a partnership. I am an investor in a partnership and own a 25% interest as a partner. I also work for the business that the partnership owns. Can I be paid through payroll, have tax withheld, and receive a Form W-2? Answer: It is long established in tax law that partners in a partnership are not employees of the partnership. In Rev. Rul. 69-184, 1969-1 CB 256, the Internal Revenue Service confirmed this, stating:

Remuneration received by a partner from the partnership is not “wages” with respect to “employment” and therefore is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration also is not subject to Federal income tax withholding.

Partners cannot receive a Form W-2 from the partnership. They may receive a draw from the partnership and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.