LLC partner reducing LLC income to get W-2 from a client

[AlbanyConsultant]

[Yeah, that topic header is a mouthful!]

My client is an LLC taxed as a partnership. One of the members told me that they are going to have a reduction in income next year because he doesn't feel right charging one of their clients hundreds of dollars per hour for a service, so instead he will actually work there part-time, earning a W-2 from them. There will be no change to the structure of the LLC, and he will still work on other LLC business as time permits.

How will this affect his compensation? The plan is a safe harbor 401(k) with the 100%-on-first-4% match, so I need to know his comp to determine the match amount.

Since the W-2 won't be paid by an entity the is sponsoring the plan, it would seem to be excluded for plan purposes. Could it be that simple? What about any effects on the other members (since the LLC will have less income, they will each receive less, and therefore 4% of their compensation will be less)?

Thanks.

[Guest Pensions in Paradise]

Let's simplify and rephrase your question. Your client is an LLC, and one of its members decides to get a part-time job at Burger Queen.

Does his W-2 pay from Burger Queen count for purposes of the LLC's plan? No.

And since the member is working at Burger Queen at night instead of working an extra 20 hours a week at the LLC, will the partners earn less than they could have had the member worked those extra 20 hours a week at the LLC? Yes.