Compensation from an LLC

[Santo Gold]

I am working with a company that was just created within the past few weeks (May 1) that was established as an LLC. Right now the only "employees" are the 3 members/owners, with other employees expected later this year.

They want to start a retirement plan, likely to be a 401(k). But as an LLC, they do not/cannot receive salary and receive no W-2. They can take draws that will be reported on Schedule K-1. Can this form of compensation be used for plan purposes? Are there any potential "issues" that this may involve? Other subsequent employees will receive regular W-2 wages.

Thank You.

[Archimage]

Their compensation will be defined as "earnings from self-employment income". This wil include guaranteed payments, share of profits, etc. that will be reported on the K-1. Your document will have a definition most likely labeled as "earned income" which will define this a little more in detail.

[Santo Gold]

Their compensation will be defined as "earnings from self-employment income". This wil include guaranteed payments, share of profits, etc. that will be reported on the K-1. Your document will have a definition most likely labeled as "earned income" which will define this a little more in detail.

I think the answer is obvious, but I have to ask anyways....does this mean that these 3 members/owners are considered to be self-employed individuals?

[Archimage]

Sorry, yes. Members of an LLC are considered self-employed.

[E as in ERISA]

That assume that they have elected to be taxed as a partnership -- which it appears they will be based on the facts that they will receive K-1s and cannot receive wages?

[Santo Gold]

That is correct, they have made that election to be taxed as a partnership.

[Guest mjb]

They will have net earnings from SE to the extent the payments are for services rendered to the LLC and not some other form of payment reported on the K-1 such as as capital gains, dividends, or return of capital as determined by the LLCs accountant. However as self employed persons they will have to pay the employer half of the FICA tax on their contributions to the plan. If the plan was taxed as a corp the FICA tax would be deducted by the corp from its gross income and not taxed to the owner.

[Santo Gold]

They will have net earnings from SE to the extent the payments are for services rendered to the LLC and not some other form of payment reported on the K-1 such as as capital gains, dividends, or return of capital as determined by the LLCs accountant. However as self employed persons they will have to pay the employer half of the FICA tax on their contributions to the plan. If the plan was taxed as a corp the FICA tax would be deducted by the corp from its gross income and not taxed to the owner.

So if they are taxed as partners, their "net earnings" on income from service to the LLC will be determined, in part, factoring in any employer contributions to the plan, similar to the "loop calculation" that is prepared for other sole props and partnerships?

[Mike Preston]

So if they are taxed as partners, their "net earnings" on income from service to the LLC will be determined, in part, factoring in any employer contributions to the plan, similar to the "loop calculation" that is prepared for other sole props and partnerships?

Not "similar to", "precisely like".