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subject to SE tax on the member’s hand, a preferential income allocation have attempted to avoid this rule by
return, despite the member’s argument can be QBI, provided the arrangement hiring a certified professional employer
that she provided only minimal services is not recharacterized as a disguised pay- organization (CPEO) to treat partners/
to the LLC. ment for services. Note, however, that LLC members as employees. A CPEO
An LLC may be considered to have a preferential income allocation is not is an employee leasing company that
a trade or business when classifying a guaranteed, so the member is exposed to meets certain criteria (see Regs. Sec.
guaranteed payment as SE income, even the risk that the LLC will have little or 301.7705-1(b)(1)). A CPEO can be
though the income and related deduc- no income to allocate. treated as the sole employer of any
tions from certain activities are generally A guaranteed payment is SE income worksite employee who is included in a
excluded from SE income. This would only if the recipient is an individual or a service contract between the CPEO and
be the case, for example, when the LLC disregarded entity (such as an SMLLC a customer (Sec. 3511).
is engaged in a rental real estate activity or a grantor trust), the income of which Proposed regulations under Sec.
that rises to the level of a trade or busi- is taxed to an individual. Other types 3511 led some practitioners to believe
ness. Although a member’s distributive of recipients, such as C corporations, S that, in some cases, a partner could be
share of the LLC’s income from the corporations, or partnerships, are not treated as an employee of a CPEO
rental real estate is not subject to SE tax subject to SE tax. If a guaranteed pay- rather than as self-employed. But the
(provided the member is not a real estate ment is received by an LLC, the income IRS clarified in Chief Counsel Advice
dealer) under Sec. 1402(a)(1) and Regs. will pass through to the members and (CCA) 201916004 that payments
Sec. 1.1402(a)-4, a guaranteed payment may be subject to SE tax under gener- made by a CPEO to a partner in a
received from such an LLC would be ally applicable rules, but not because partnership under a contract between
subject SE tax. the income received by the LLC was a the partnership and the CPEO must
When the LLC’s income is predict- guaranteed payment (Sec. 1402(a)). always be treated as a payment to a self-
able, a member in this situation wishing employed individual.
to avoid SE income might rather receive Retirement payments Planning tip: LLCs sometimes
a preferential allocation of LLC income Certain retirement payments to LLC grant a profits interest to employees as
than a guaranteed payment of the same members are not subject to SE tax, pro- incentive compensation. The LLC and
amount. Even though the economic vided they meet specific requirements. the individual might prefer that the
effect to all concerned would be gener- The payments must be made under a individual retain employee status, espe-
ally the same, the income from the written retirement plan that provides cially if the profits interest is relatively
preferential allocation would be part of for bona fide retirement payments on a small. CCA 201916004 indicates that
the member’s distributive share of rental periodic basis to members generally, or the IRS considers Rev. Rul. 69-184 to
income and would be excluded from SE to a class or classes of members, and the apply without exception. Although the
income, whereas the guaranteed pay- payments must continue at least until IRS has asked for comments in the past
ment would constitute SE income. the member’s death. To constitute bona about situations where it might be ap-
Caution: Under Sec. 707(a)(2), if a fide retirement payments, the payments propriate to treat partners as employees,
member performs services for an LLC must be paid on account of retirement there is currently no basis for treating
and receives a related income allocation and measured by and based upon such individuals who are partners as employ-
and distribution, the arrangement may factors as years of service and compensa- ees for employment tax purposes.
be treated as a payment to a third party tion received. Eligibility to receive such
for services. Under proposed regula- retirement payments generally must be Rental income
tions, when this disguised-payment- based on age or physical condition or a As a general rule, rental income from
for-services rule applies, it applies for combination of age or physical condi- real estate (including personal property
all purposes of the Code, including tion and years of service (Regs. Sec. leased with the real estate) is exempt
SE taxes. 1.1402(a)-17(b)(1)). from SE tax, unless the taxpayer is
Planning tip: Although a guaran- a dealer in real estate (Regs. Sec.
teed payment and a preferential income Members as employees 1.1402(a)-4(a)). This rule applies re-
allocation followed by a distribution Members of an LLC that is classified gardless of how the activity is character-
can be economically similar, guaranteed as a partnership for federal income tax ized under the passive-activity-loss rules.
payments received by members are not purposes cannot be employees of the However, income derived from renting
qualified business income (QBI) for LLC for employment tax purposes living space (private residences or
the Sec. 199A deduction. On the other (Rev. Rul. 69-184). Some taxpayers multiple-housing units such as condos)

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