non active members of LLC in ADP test

[Jim Chad]

LLC  taxed as Partnership, has 2 owners in active management.  The 3rd owner is not active and not deferring.  I want to include him in testing because his zero will help. 

Is it correct to include him in testing?

 

[C. B. Zeller]

Depends what you mean by "not active." Does the 3rd partner have comp that is eligible for deferral and simply elected not to defer? Then include him in the test. Is he a limited partner that contributes capital to the partnership but not any personal services? Then he would not be included.

[Larry Starr]

9 hours ago, Jim Chad said:

LLC  taxed as Partnership, has 2 owners in active management.  The 3rd owner is not active and not deferring.  I want to include him in testing because his zero will help. 

Is it correct to include him in testing?

 

If he's a passive investor/partner, then he is not eligible and won't have Self-Employment Income, so you can't include him.

This from the IRS (particularly see the second bulleted paragraph):

Question

Are partners considered employees of a partnership or are they considered self-employed?

Answer

Partners in a partnership (including certain members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership.

• If you're a general partner of a partnership (or treated as a general partner in an LLC) that carries on a trade or business, your net earnings from self-employment include your distributive share of the income or loss from that trade or business. General partners must also include guaranteed payments as net earnings from self-employment.
• If you're a limited partner of a partnership (or treated as a limited partner in an LLC) that carries on a trade or business, only guaranteed payments for services you rendered to, or on behalf of, the partnership are net earnings from self-employment. Limited partners don't pay self-employment tax on their distributive share of partnership income, but do pay self-employment tax on guaranteed payments.

Additional Information

Instructions for Form 1065, U.S. Return of Partnership Income

Publication 541, Partnerships

Publication 3402, Taxation of Limited Liability Companies

Publication 334, Tax Guide for Small Business