Members as Employees of LLCs: Using Tiered LLCs, Separate S Corporations, and Leasing Companies to Pay Owners

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, September 22, 2021

Recorded event now available

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Course Materials

This course will discuss specific scenarios where LLC owners can be treated as employees for tax purposes. Our panel of flow-through taxation veterans will discuss structuring alternatives that permit members of an LLC to qualify for employee treatment, including the use of employee leasing arrangements, tiered LLC structures and admission of separate S corporations.

Description

Partnerships, including LLCs taxable as partnerships, often choose to grant ownership interests to individuals who provide services to the entity. A long-standing IRS ruling dictates that a partner who is paid compensation for services to a partnership cannot receive a W-2 for wages and is not eligible for certain employee fringe benefits. Although compensation for services paid to members of LLCs generally must be treated as guaranteed payments, subject to self-employment tax (but not withholding), some LLCs may be improperly reporting these payments as wages (subject to withholding).

An attempt to treat compensation payments by an LLC to a member as wages comes with risks. For example, because the member is responsible for self-employment taxes, payment of the employer portion of any FICA taxes may be characterized as additional compensation to the member (subject to additional income and self-employment tax). Further, any reported exclusion from a member’s income of amounts paid in connection with the member’s participation in a Section 125 cafeteria plan could be disallowed and also treated as additional compensation to the member.

Alternatives structures may be available that allow an LLC to treat an owner as an employee receiving wages and entitled to employee fringe benefits. Tax practitioners working with entities taxable as partnerships, including LLCs, should understand these potential structuring options.

Listen as our panel of partnership taxation experts explains how an LLC may be able to treat an owner as an employee for tax purposes.

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Outline

  1. Withholding for Employees
  2. Guaranteed Payments to Members
  3. Potential Consequences of Incorrect Treatment
  4. Employee Leasing Companies
  5. Separate S Corporations
  6. Tiered LLCs
  7. Pros and Cons of Alternatives
  8. Employee Fringe Benefit Consideration

Benefits

The panel will cover these and other critical issues:

  • Guaranteed payments to members
  • Potential consequences of incorrect treatment
  • Alternatives to permit employee treatment of LLC owners
  • Employee fringe benefit consideration

Faculty

Aderman, Richard
Richard E. Aderman

Partner
Taft Stettinius & Hollister

Mr. Aderman focuses his attention on analyzing the tax consequences of complex business transactions, including...  |  Read More

Hager-Benjamin
Benjamin W. Hager

Partner
Taft Stettinius & Hollister

Mr. Hager's practice includes the areas of business entity formations, mergers and acquisitions, reorganizations,...  |  Read More

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