Page 534 - TaxAdviser_2022

CASE STUDY

Self-employment tax

and LLCs

Editor: Net income from self-employment is subject to SE tax on the SMLLC’s
Shaun M. Hunley, J.D., LL.M. defined in Sec. 1402(a) as net income net income.
from any trade or business plus the dis-
tributive share (whether or not actually Related SE tax issues facing
distributed) of income or loss (to the LLCs
extent a loss is not limited by the basis, Guaranteed payments
passive activity, at-risk, or other rules) Guaranteed payments, whether received
from any trade or business carried on for services or for the use of capital, are
An LLC member’s by a partnership (including a limited included in an individual’s net earn-
distributive share of liability company (LLC) classified as ings subject to SE tax unless they are
LLC income and a partnership for federal income tax received from an LLC that is not en-
purposes). Rev. Rul. 65-272 provides
gaged in a trade or business (Regs. Sec.
loss from a trade that items of income and allowable 1.1402(a)-1(b)). With a few limited
or business is deductions attributable to any trade exclusions, “trade or business” has the
same broad meaning for this purpose
or business carried on by a partner-
generally subject to ship that are required to be taken into as it has in Sec. 162 (Sec. 1402(c);
self-employment tax, account separately under Secs. 702(a) Regs. Sec. 1.1402(c)-1). The exclusions
raising several issues (1) through (8), plus any distributive are those set forth in Secs. 1402(c)(1)
through (6) and Regs. Secs. 1.1402(c)-2
share of partnership income or loss,
around guaranteed are considered as realized from a trade through -7 (e.g., services performed as
payments, retirement or business and used in computing an an employee covered by Social Security
or the Railroad Retirement program,
individual partner’s net earnings from
payments, rental self-employment to the extent not certain services performed as a public
income, and members otherwise excluded under Sec. 1402(a). official, and certain services performed
by ordained ministers and other reli-
This general rule implies that members
who are employees of an LLC classified as a partnership gious personnel).
of the LLC. are subject to self-employment (SE) Planning tip: A limited partner
tax on their share of the LLC’s income is subject to SE tax on guaranteed
from a trade or business. However, Sec. payments only to the extent they are
1402(a)(13) provides an exception for received for services (Sec. 1402(a)(13)).
limited partners. A member’s treatment of a payment
Note: Since the existence of a for SE tax must be consistent with the
single-member LLC (SMLLC) is dis- treatment on the LLC’s Form 1065, PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted from regarded for most federal tax purposes U.S. Return of Partnership Income. In
Checkpoint Tax Planning and Advisory (unless the SMLLC elects to be clas- Howell, T.C. Memo. 2012-303, the court
Guide’s Limited Liability Companies
topic. Published by Thomson Reuters, sified as a corporation), an individual concluded that payments treated as
Carrollton, Texas, 2022 (800-431-9025; who owns a disregarded SMLLC that guaranteed payments on the return filed
tax.thomsonreuters.com). is engaged in a business clearly is by the LLC were guaranteed payments

48 October 2022 The Tax Adviser