Key Takeaways

  • Multi-member LLCs are typically treated as partnerships for tax purposes, and each member reports and pays self-employment tax on their distributive share of profits, even if not withdrawn.
  • Self-employment tax covers both Social Security and Medicare contributions, with LLC members paying the full 15.3% rather than splitting it with an employer.
  • Members must make quarterly estimated payments to avoid IRS penalties and can reduce taxable income through legitimate business deductions.
  • Certain LLC tax elections—such as electing S corporation status—can reduce self-employment tax liability if structured properly.
  • Passive members who do not materially participate in business operations may not owe self-employment tax on certain income, but eligibility depends on IRS rules.

LLC member self-employment tax must be paid by LLC owners/members. This is due to profits and losses of the company being passed through to each owner/member, who will, in turn, report the information on their tax return.

Overview of Taxes and LLCs

Single-owner LLCs

As a pass-through entity, LLCs are treated in the same manner when it comes to taxes as a sole proprietorship or partnership. It is not a separate entity like a corporation. A limited liability company does not pay federal income taxes on itself although some states do charge the LLC a tax.

As a single-owner, the Internal Revenue Service treats a one-member LLC as a sole proprietorship. This means the LLC itself is not subject to federal taxes and does not file a tax return. As the sole LLC owner, profits and losses are reported to the IRS on Schedule C and submitted with the 1040 tax return.

Some LLCs choose to leave the company's profits in the business bank account for future purchases or expenses. Regardless, you must pay taxes on the profits being rolled over to the new year.

Multi-owner LLCs

In the case of multi-owner LLCs, the IRS treats these co-owned entities as partnerships when it comes to taxes. In a co-owned LLC, the owners pay taxes based on their share of the profits when filing their personal tax return on Form 1040 along with Schedule E.

Form 1065 must be filed with the IRS for the LLC. This form is an informational return that the IRS uses to ensure each LLC member is correctly reporting their income.

The amount of each LLC owners' share of the profits and losses is called a distributive share. The breakdown of each owners' distributive share is outlined in the LLCs operating agreement. When creating the operating agreement, the members' distributive share portion is determined according to his or her percentage of interest in the company.

An example of a distributive share would be one person owning 60 percent of the company and the co-owner owning 40 percent. When the profits and losses are shared, one is entitled to 60 percent and the other 40 percent.

It is possible to divide the distributive shares in a manner that is not proportionate to each member's percentage interest in the LLC. To do so is called a "special allocation" with specific rules from the IRS that must be followed.

The IRS treats each member of the LLC as though they received their yearly distributive share. What this means to each LLC member is they are responsible for paying taxes on their distributive share regardless of whether or not the money was distributed.

Tax Classification and Its Impact on Self-Employment Tax

The way your LLC is classified for federal tax purposes directly affects self-employment tax obligations. By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a partnership. Both structures pass income and losses through to the members’ personal tax returns, triggering self-employment tax on business profits.

However, an LLC can elect to be taxed as a C corporation or S corporation by filing IRS Form 8832 or Form 2553. Under an S corporation election, owners can receive part of their compensation as “reasonable salary” (subject to payroll taxes) and the remainder as distributions, which may not be subject to self-employment tax. This strategy can reduce overall tax liability but must comply with IRS reasonable compensation rules to avoid penalties.

Self-Employment Income and Tax

Self-employment is defined as the gross income an individual receives from a business or trade that they operate less any deductions. The owner of a business will pay self-employment tax on income whether it's earned directly or through a partnership.

Self-employment tax is for Social Security and Medicare taxes. Self-employed persons pay the entire tax amount versus an employer who pays half of these taxes and the employee pays the other half.

For income tax purposes, an LLC is generally treated as either a disregarded entity or as a partnership. If you are a member of an LLC being taxed as a disregarded entity, or a sole proprietor, or a partner in a general partnership, self-employment tax must be paid.

If self-employment tax and income tax are not estimated and quarterly tax payments are not made to the Internal Revenue Service, you may be subject to penalties and fines.

Online self-employment tax calculators are available to help with estimating taxes.

  • LLC members are not considered employees. They are self-employed business owners who are not subject to tax withholding.
  • It is the responsibility of each LLC member to pay taxes on his or her share of the profits.
  • Members must estimate their tax responsibility for the year and submit payments to the IRS and the appropriate state agency, if applicable.
  • Estimated payments are made quarterly in April, June, September, and January.
  • Legitimate business expenses can be deducted from your business income to help lower the profit amount reported to the IRS.
  • Deductible expenses include such things as advertising, promotion costs, travel, entertainment, and automobile.

Calculating and Paying Multi-Member LLC Self-Employment Tax

For a multi-member LLC, self-employment tax applies to each member’s net earnings from self-employment, which includes their distributive share of the LLC’s income. The 2024 self-employment tax rate is 15.3%, broken down into:

  • 12.4% for Social Security (applied to the first $168,600 of net earnings)
  • 2.9% for Medicare (applied to all net earnings)
  • An additional 0.9% Medicare surtax for high-income earners ($200,000 for single filers, $250,000 for joint filers)

Members calculate this tax using Schedule SE and pay it alongside income tax. Payments are typically made quarterly using Form 1040-ES.

Exceptions for Passive Members and Limited Partners

Not all LLC members must pay self-employment tax on all income. The IRS generally exempts limited partners from self-employment tax on their share of business income, except for guaranteed payments for services. Similarly, passive members who do not materially participate in the business may avoid self-employment tax on certain portions of their income. However, determining whether you qualify as a passive investor can be complex and depends on IRS material participation standards. Misclassification can result in back taxes, penalties, and interest.

Strategies to Reduce Self-Employment Tax Liability

LLC members seeking to reduce self-employment tax can consider:

  1. Electing S Corporation Taxation – Pay yourself a reasonable salary and take remaining profits as distributions.
  2. Deducting Eligible Business Expenses – Include costs for home office use, equipment, travel, and marketing.
  3. Maximizing Retirement Contributions – Use SEP IRAs, Solo 401(k)s, or SIMPLE IRAs to lower taxable income.
  4. Health Insurance Deductions – Deduct premiums if you qualify as self-employed.

These strategies should be evaluated with a tax professional to ensure compliance with IRS regulations.

Frequently Asked Questions

1. Do all multi-member LLC members have to pay self-employment tax?

Yes, unless they qualify as limited partners or passive investors under IRS rules.

2. Can electing S corporation status reduce self-employment tax?

Yes, by splitting income into salary (taxable for Social Security and Medicare) and distributions (often exempt from self-employment tax).

3. How often do LLC members pay self-employment tax?

Quarterly, through estimated tax payments to the IRS.

4. Is self-employment tax different from income tax?

Yes. Self-employment tax covers Social Security and Medicare contributions, while income tax is based on your overall taxable income.

5. Can LLC members deduct expenses to reduce self-employment tax?

Yes. Deducting legitimate business expenses lowers your net earnings, which reduces the self-employment tax owed.

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