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Frequently Asked Questions

How are LLC members treated for self-employment taxes and what are their obligations?

LLC members are treated as self-employed business owners rather than employees, which means they are not subject to withholdings. Instead, they are required to set aside enough money to cover taxes on their share of the LLC profits. They must estimate the taxes owed for the year and send the IRS quarterly payments, along with any local state tax agency. Since LLC members are not employees, they are not required to contribute to Social Security and Medicare. Instead, they must pay self-employment taxes to the IRS. Inactive members may be exempt from this tax. The self-employment tax is reported on Schedule SE, which is submitted with the 1040. It's important to look for possible deductions which can lower the profits you need to report to the IRS. These deductions can include start-up costs, travel and auto expenses, equipment expenditures, and marketing and advertising costs. Each LLC member must receive a Schedule K-1, which itemizes profits and losses. Each member pays taxes based on their membership share of profits and losses, known as distributive shares. These shares should be set forth in the LLC's operating agreement. Members are required to pay taxes on the entire distributive share, even if the LLC didn't distribute the money.
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