Limited Liability Companies (LLCs) are confusing when it comes to taxes. You can tell by the questions I get. In today’s article, I answer a question about a multi-member LLC and payroll taxes. But let’s start with the basic facts about LLCs. This is where a lot of people get confused.
If you form an S Corporation, you file an S Corporation tax return. If you form a C Corp, you file a C Corp tax return.
But if you form an LLC, you don’t file an LLC tax return. That’s because there is no LLC tax return. You can elect how you want to be taxed. If you don’t elect, there is default taxation,
Single member LLC (one owner) is either Schedule C (business), Schedule E (real estate) or Schedule F (farm). A multi-member LLC is a partnership.
Real Estate, Multi-members and Payroll Tax. Now what?
That’s the background. Now here is the question:
“I’m planning to buy out of state real estate and I’m forming a 2 member LLC. One of the members is the manager responsible for day-to-day operation.
Does the member manager have to pay self-employment taxes and the non-manager member doesn’t because is not active? Or because the LLC is a pass thru none of the members have to pay self-employment taxes.”
Kinda, but not really.
The multi-member LLC will be taxed like a partnership. So, we need to look at partnership rules.
And for the partnership, we have to look at the type of income to determine how it will be taxed.
With a Partnership, First Look at the Type of Income
You have real estate income, so it would be taxed like real estate would be without the LLC.
Real estate income that is passive (which I assume this is) is not subject to self-employment tax. If you have an active business, you have self-employment tax concerns.
If your LLC/Partnership (LLC-P) has passive real estate income only, there is no self-employment tax for the members.
Likewise, the LLC-P doesn’t pay any payroll tax.
How Income is Reported to Members in an LLC–P
The type of income is reported on the Schedule K-1 for the member. The member then shows that detail on his or her tax return and that’s where the self-employment tax, if applicable, is paid.
However, as we’ve discussed since this is passive real estate income, there is no self-employment tax for anyone.
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