Vol. 9, No. 1, Pg. 42. Imposition of Self Employment Taxes on Members of LLCs.

• Author: By Scott Y. Barnes

South Carolina Lawyer

1997.

Vol. 9, No. 1, Pg. 42.

Imposition of Self Employment Taxes on Members of LLCs

42IMPOSITION OF SELF EMPLOYMENT TAXES ON MEMBERS OF LLCSBy Scott Y. BarnesAccordingly, the IRS withdrew the 1991 propose lotions and on January 13, 1997, issued new proposed regulations that applied to all entities classified as a partnership for federal tax-purposes, regardless of the state law characterization of the entity.

In December 1994, the Internal Revenue Service (IRS) issued proposed regulations pertaining to the imposition of self-employment taxes under Internal Revenue Code (IRC) § 1402 on members of limited liability companies (LLCs).

The 1994 proposed regulations required a number of legal and factual determinations that were difficult for taxpayers and the IRS to make with any certainty. Accordingly, the IRS withdrew the 1994 proposed regulations and on January 13, 1997, issued new proposed regulations that applied to all entities classified as a partnership for federal tax purposes, regardless of the state law characterization of the entity.

These proposed regulations adopt an approach that depends on the relationship between the partner, the partnership and the partnership's business as opposed to a state law characterization of an individual as a limited partner.

SELF-EMPLOYMENT TAX

IRC § 1401 of the IRC imposes a 12.4 percent tax on the self-employment of every individual for old age, survival and disability insurance. It also imposes a 2.9 percent tax on the self-employment income of every individual for hospital insurance.

This tax is in addition to federal income taxes, FICA and FUTA withholding taxes on earned income.

Section 1402 defines net earnings from self-employment as the gross income derived by an individual from any trade or business carried on by such individual, less the deductions attributable to such trade or business plus an individual's distributive share of income or loss from any trade or business carried on by a partnership of which he or she is a member.

Certain partnership income-such as rent, capital gains and the distributive share of any item of income of a limited partner-is excluded from the definition of net earnings from self-employment. Under § 1402(a)(13), a limited partner's share of partnership income is not included as income for self employment tax purposes...