SE tax treatment of LLCs' members.

• Author: Starr, Samuel P.
• Position: Self-employment, limited liability company

Prop. Regs. Sec. 1.1402(a)-18 governs the self-employment (SE) tax treatment of members of limited liability companies (LLCs) classified as partnerships for Federal tax purposes. Members that may be treated as limited partners under local law generally may exclude their distributive shares from net income from SE. Prop. Regs. Sec. 1.1402(a)-18 will be effective for the member's first tax year beginning on or after the date on which it is published in final form in the Federal Register.

In general, SE taxes are imposed on income an individual derives from any trade or business that individual carries on (less allowable deductions), plus the individual's distributive share of income or loss from a trade or business carried on by a partnership of which the individual is a member. Sec. 1402(a)(13) excepts from "net earnings from self-employment" a limited partner's distributive share of income or loss (other than guaranteed payments made to the limited partner for services rendered to the partnership or on behalf of it).

LLC statutes have been enacted by virtually all the states and several foreign jurisdictions. Under local laws they are generally managed by elected or designated managers. However, in some jurisdictions, an LLC need not be administered by a manager, in which case all members of the LLC have management authority. For Federal tax purposes, most...