When May a Member of an LLC Take a Salary Under Federal Law?
When considering whether to make a small business or corporate election (both of which require an affirmative election) or leave your LLC as a pass-through or allow it to be taxed as a partnership (the defaults), the organizer(s) should consider whether they may wish one or more owners to receive a salary (as contrasted with an advance on a distribution).
A member of an LLC may take a salary under federal law if the LLC is taxed as a corporation or has made a small business election. This gives owners the flexibility to pay salaries to their owners (i.e., W-2 wages) which allows for compensation that differs from the ownership percentage in the LLC. As an example, two equal (50%) owners of an LLC that have made a small business election may pay one owner but not to the other and, at the end of the year, divide all remaining profits of the LLC equally (as required by Florida law). The IRS may view salaries that are unreasonably high as being compensation for services not actually being rendered that may have other tax consequences. There also is potential payroll tax savings.
A member of an LLC may not take a salary under federal law if the LLC is taxed as a partnership or is a pass-through entity. If an LLC taxed as a partnership or pass-through entity does pay salaries to its owners, the IRS may view the salaries as unreasonable and reclassify them as distributions of profits. This could result in the owners being subject to additional taxes.
A member of an LLC may take a salary under federal law if the LLC is taxed as a corporation (including having made a small business election). However, a member of an LLC may not take a salary under federal law if the LLC is taxed as a partnership or a disregarded entity that has not made a small business election. Consult with a tax advisor to determine whether it is appropriate for you to take a salary from your LLC and to carefully discuss your plan when creating your LLC with your business lawyer. The attorney at Marlowe Law can explain this is more detail when forming your LLC and deciding how to pay the owners of your company.