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LLC CPA discusses Limited Partner Self-Employment Tax | Form 1065

LLC CPA Wilmington NC

Gary Bode, CPA: all IRS LLC issues aren't definitive! For a free phone consult, call 399-2705.

Self-employment tax issues still exist for LLC Members because the IRS isn’t definitive about the subject – at least in some circumstances. Check with your LLC CPA, as this post offers only general guidance on a non-definitive subject.

Self-Employment Tax, in General

A traditional employee pays Social Security and Medicare taxes. The employer matches these taxes, generally speaking. Self-employment tax combines the employer and employee tax components for folks working for themselves. Obviously, taxpayers often avoid self-employment tax when possible. Even though part of it builds up your potential Social Security check amount when you’re old and gray! Dream on. As a LLC CPA, I like to use a rule of thumb to help clients visualize taxation issues. The self-employment tax rates can fluctuate, but figure they’re about 15% of your income from a LLC if you must pay them.

LLC Self Employment Tax

If you’re a Single Member LLC, all your profit is subject to self-employment tax. Consider electing to be taxed as an S Corporation for partial relief.

Most Multi-Member LLCs can elect to be taxed as a Partnership. Limited partners do not incur self-employment tax. Limited partners usually:

  • Have no personal liability for the debts of or claims against the LLC by reason of being a partner/member.
  • Have no authority under state law to contract on behalf of the LLC.
  • Don’t participate in the LLC’s trade or business over 500 hours during the entity’s taxable year.

The IRS Wrinkles

  • Members of LLCs engaged in the practice of health, law, engineering, architecture, accounting (darn it), actuarial science, or consulting aren’t generally limited partners and thus are subject to SE tax unless they provide no services to or on behalf of the LLC.
  • A Member of an LLC can be treated as a limited partner even if he/she participates in the LLC’s trade or business for more than 500 hours if 1)  The member would be treated as a limited partner if not for his/her participation in the LLC’s trade or business for more than 500 hours or 2) Other members who are treated as limited partners own a substantial continuing interest in the LLC; and/or 3) Other members have rights and obligations with respect to their membership interests in the LLC that are identical to those of the member participating in the LLC’s activity for more than 500 hours during the taxable year.

I suggest documenting cases well where your LLC claims Limited Partners.

We’re a CPA firm that deals extensively with LLC taxation. Thanks to our Virtual Office, we offer excellent service to long distant and international clients. For a free phone consult, please call (910) 399-2705.

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