September 16, 2016

Paying Members Of An LLC For Services Performed

Is it possible for a Member of an LLC to become an employee of the Company and receive a regular salary?

In a related question, I have an LLC that received a grant, and part of the grant funds salaries and benefits. If the payee through the grant is a Member of the LLC, are these payments considered salaries, taxable to the LLC?

Thanks,
Michael

Answer

Yes, you can.

When an LLC pays an active member a salary for services performed, it’s called a “guaranteed payment”.

However, the IRS places limits on how much an LLC can pay a member as a salary and how much is considered return of profits.

The IRS requirement is that the amount of teh salary for active LLC members must be reasonable in light of the services actually performed. In other words, if you pay a member $250,000 a year to sweep the floors, that won’t fly.

But, if you were to pay the prevailing local wage/salary for the job function performed, then there is no reason for the IRS succeed in challenging you.

See IRS Publication 535, Chapter 2 for more info.

Remember that the LLC is permitted to deduct the salary paid to members from its revenue to determine the amount of its profits.

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