(866) 480-2611

LLCs Subject Owners to Self-Employment Tax


LLCs are perhaps the most commonly-used entity form for new business ventures. They are easy to form and operate; they provide the owners of the business protection against personal liability for obligations of the company; and unlike traditional corporations, LLCs themselves pay no income taxes.


LLCs can, however, have a significant drawback for owners. LLCs are generally treated for tax purposes as either a proprietorship (if there is only one owner) or partnerships (if there is more than one owner). Neither of these entity forms is treated as being separate from its owner(s), and any company profit is taxed at the owners’ individual rates.


At first blush, this appears to be desirable, and it is – with respect to income taxes. Unfortunately, income taxes are not the whole story. Along with income taxes, owners of a business must pay employment taxes, primarily Social Security and Medicare taxes.


Under the Federal Insurance Contributions Act (“FICA”), an employee of a business must pay 7.65% of the employee’s income to cover the employee’s Social Security and Medicare taxes. Employers match this “contribution”, meaning that the total amount payable under FICA is 15.3% of the employee’s income. FICA dips to 2.9% of income above $117,000.


FICA is not an “income tax”. It is an employment tax, collected only on income derived through work. It is not chargeable on dividend or rental income, for example.


A person who is self-employed is, for tax purposes, considered both employer and employee. In other words, a self-employed person pays the full 15.3% due under FICA. This is called “self-employment tax” rather than FICA, but in all respects the taxes are identical.


These concepts are critical to understand, because the owners of an LLC are considered “self-employed” if they perform services for the business. Only if they are purely “passive” investors can they avoid paying self-employment tax on any earnings allocated to them through the LLC.


Contrast this with the possible treatment of shareholders in a corporation. Corporations are considered separate entities from their shareholders for all purposes, including taxation. A shareholder who works in the business is compensated in two separate ways. The shareholder is compensated for services performed in the operation of the business. FICA is collected on this amount. The shareholder is also entitled to his or her portion of the profits of the business, and this concept applies whether the shareholder actually works in the business or not. In other words, a corporation’s shareholders can divide their income from the company into two streams, only one of which is subject to the 15.3% burden of FICA. The other portion is not.


Small business owners should be aware of something called a “subchapter S corporation”. Sub-S corporations are similar to LLCs in that they do not themselves pay tax; as with LLCs, the shareholders pay income taxes on the portion of the company’s profits allocated to them. In a subchapter S corporation, the owners, through skillful planning, can avoid at least some of the self-employment taxes on their earnings. Members of an LLC do not have this option if they work in the company’s business.


Working through the question of which form of entity to choose when starting a business requires more thought than some might think. This article does not cover all of the variables that must be considered or even all of the available choices. The point though, is plain: It’s not as simple as you might think. Do some research, talk to a lawyer and an accountant, and choose wisely.


Accounts Receivable
Bad Credit Business Loan 1
Bad Credit Business Loans
Bank Loan
Borrowing Money
Business Capital
Business Cash Advances
Business Debt
Business Equity
Business Financing Services
Business Leadership
Business Line of Credit
Business Loan
Business Loan Bad Credit
Business Loans
Buying Equipment
Cash Flow
Child Care
Construction Factoring
Credit Card Factoring
Credit Reports
Credit Utilization
Equipment Finance
Equipment Leasing
Equipment Purchase
Factoring Accounts Receivable
Flexible Factoring Options
Franchise Funding
Freight Factoring
General Finance
Green Business
Hardware Stores
Industry Specific Articles
Landscape Contracting
Late Fees
Medical Accounts Receivable
Medical Supply Providers
Merchant Advance
Merchant Cash Advance
Merchant Cash Advance Loans
Merchant Finance
Merchant Loan
Mobile Payment Solutions
New York Business Loan
Real Estate Management
SBA Loan
Small Business
Small Business Credit
Small Business Credit Line
Small Business Development Services
Small Business Finance
Small Business Financial Tips
Small Business Investors
Small Business Line of Credit
Small Business Loan
Small Business Loans
Small Business Marketing
Small Business Sales
Small Business Sales
Starting a Small Business
Startup Financing
Trucking and Transportation
Unsecured Business Lines of Credit
Unsecured Business Loans
Unsecured Business Loans for Bad Credit
Unsecured Credit Line for Small Businesses
Unsecured Financing
Unsecured Line of Credit
Unsecured Lines of Credit for No Credit Businesses
Unsecured Loans for Bad Credit

Nurturing Business, Cultivating Hope

Putting Our Clients First Since 2008.
Become A Partner
Partner with us to reach potential merchants using our patented technology on the Advance Funds Network platform.
464 Kings Highway Brooklyn, NY 11223
1633 Rt 35N Unit 4 Oakhurst, NJ 07755
5858 Dryden Place Carlsbad, CA 92008 Suite 238
2967 Dundas St. W. #220D Toronto, ON M6P 1Z2
(866) 480-2611
Important Information About Procedures for Opening a New Account
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.
© Advance Funds Network 2023. All rights reserved.