Question 254: When is a member of an LLC considered self-employeed? Suppose Ilene is a member of an LLC who manages its staff, calculates payroll and does general accounting but does not get paid for her time. She has no IRS Form 1099 or W-2. Is she considered an employee, self-employed or just a member who works for free?
Answer: First and foremost, whenever you deal with an LLC, you must learn how the LLC is taxed. Most LLCs with more than one member are taxed as a partnership, but some have chosen to be taxed as a corporation. LLCs with a single member are disregarded as separate entities (e.g., taxed as a sole proprietorship) if they do not elect to be taxed as a corporation. (Q 1:7. References to "Q" are to numbered questions addressed in the 3rd edition of my book, Who's the Employer; they can be viewed online by subscribers.)

Let's assume this LLC is taxed as a partnership; the owners hence are treated as partners. It doesn't matter whether they have W-2 or 1099 income. In fact, it would be wrong for an LLC that's taxed as a partnership to give a W-2 or a 1099 to one of its members. (Q 1:14.) Instead, the partner's income is based on the K-1 from the LLC to the partner.

Like other partners, an LLC member has net earnings from self-employment, as shown on the K-1. (Q 1:11.) From your description, it sounds like Ilene's services are a material income-producing factor, so she would be a self-employed individual. (Q 1:10.) Similar reasoning would apply if she were treated as a sole proprietor.

What if the LLC is taxed as a corporation? In that case, it sounds like Ilene is an employee of the corporation, an unpaid employee. Even if the LLC is taxed as an S Corporation, Ilene's compensation would be zero, because S Corporation dividends are not compensation for plan purposes. (Q 3:1.)

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.