Key Takeaways

  • LLC members are generally not employees; they receive profits or guaranteed payments rather than wages.
  • The IRS does not allow someone to be both a member and an employee unless the LLC elects corporate taxation.
  • Electing S corp or C corp status allows members to be paid as employees through payroll.
  • Employment agreements and guaranteed payments can provide compensation but are treated differently for tax purposes.
  • States may have unique rules, so compliance depends on both federal tax law and state-specific regulations.

Are LLC members employees? Technically, LLC members are neither partners nor employees. LLC owners are considered members, or owners, under state law.

LLCs are a unique model in the business world. That's why it's especially important to understand state and IRS rules pertaining to LLC members. If you're an LLC owner, it's safe to say you work for the LLC. Still, under most circumstances you won't be considered an employee.

Profits, Not Wages

Typically, LLC owners are paid a certain percentage of the company's profits, not wages or salaries. A proper LLC agreement will lay out every member's percentage of ownership. Then, they'll receive their allotted percentage of the profit. There are no W-2s or paychecks at any point throughout this process.

As for tax purposes, an LLC member's profits and losses are counted as personal income. If an LLC member isn't active in the business -- only acting as an investor -- he or she may not be required to pay self-employment tax.

One of the reasons LLCs are a unique model in the business world is because they serve as a bit of a pass-through for tax purposes. The LLC itself doesn't pay taxes. Rather, each of the members reports individually.

If you're the only member of your LLC, then you can expect to be taxed as a sole proprietorship or a corporation. If there are other members, then you can expect to be taxed as a partnership of a corporation.

Member vs. Employee Status Explained

The IRS generally does not recognize LLC members as employees because they are considered self-employed owners. Instead of wages, members receive a share of profits or guaranteed payments. This distinction is important:

  • Members are taxed on self-employment income and file Schedule SE with their personal returns.
  • Employees have payroll taxes withheld, and the employer matches Social Security and Medicare contributions.

This means an LLC member cannot simply be added to the payroll unless the business has elected to be taxed as a corporation. Without that election, members are treated as owners even if they perform daily operational tasks.

Exception to the Employee Rule

There is one scenario where it's not such a clear-cut line between LLC members and employees. If you opt to be taxed as a corporation, your members may become salaried employees.

So, if an LLC member is providing services to the corporation in return for payment, that income will be considered employment income, which must be reported to the IRS.

Each state has a specific set of rules regarding members and employees. It's paramount to your success that you read them carefully, as they can change every year.

If an LLC member becomes an employee, his or her salary will be subject to federal tax withholding, as opposed to self-employment tax. This may serve as an advantage to that member.

When an LLC Member Can Be an Employee

The only way an LLC member can also be treated as an employee is if the LLC elects to be taxed as an S corporation or C corporation. In that case:

  • Members who provide services can receive reasonable salaries reported on a W-2.
  • Additional distributions of profits may be paid as dividends or owner draws.
  • Employment taxes (Social Security and Medicare) are withheld on the salary portion only.

For example, in an S corporation election, an owner-member might take a $60,000 salary and receive $40,000 in profit distributions. Only the salary is subject to payroll taxes, reducing overall self-employment tax obligations.

More Tax Information

With regard to federal taxes, no one may be considered both a member and an employee. When most people refer to an LLC, they're referring to one that is being taxed as a partnership.

If someone owns 100% of the equity interests, then the income must be reported on that person's individual income tax return. These funds will be reported as self-employment income from a sole proprietorship.

An LLC member that simply provides services will not be treated as an employee for income tax purposes. Those services will be labeled as "guaranteed payments" to an LLC member and are paid in lieu of wages.

Guaranteed payments are deductible by the LLC. The LLC member who receives guaranteed payments will have to treat them as self-employment income on their federal income taxes.

Guaranteed Payments vs. Wages

For LLCs taxed as partnerships, compensation for services is often structured as guaranteed payments rather than wages. These payments:

  • Are deductible by the LLC as a business expense.
  • Must be reported as self-employment income by the receiving member.
  • Do not come with payroll tax withholding, leaving members responsible for estimated tax payments.

By contrast, wages in a corporate-taxed LLC are subject to withholding and employment taxes. Understanding this difference helps answer the common question: can a member of an LLC be an employee? For most default LLCs, the answer is no, but guaranteed payments provide a functional alternative.

Alternative Methods

An LLC may use one of three alternative methods to allow owners who provide a service to be classified as employees. They are:

  • Employee Leasing Company
  • Separate S Corporation
  • Tiered LLC Structure

An employee leasing company requires the formation of a separate employee leasing company which will employ workers with equity interests in the LLC. Essentially, the agency is leasing workers to the LLC. That leasing company will then go on to become a C corporation. The payments made to it are intended to minimize the taxable income faced by the leasing company.

A separate S corporation requires every LLC member that provides services to hold membership interests through an S corporation that's 100% owned by the member. This treats the S corporation as the member, rather than the individual, and makes the service provider an employee of the LLC.

A tiered LLC structure requires the admittance of individuals who provide services to the LLC as members of a separate LLC. In this scenario, the separate LLC, or an investment LLC, will own a membership interest in the LLC, rather than the individuals. Each entity will be taxed as a separate partnership during federal tax season.

State-Specific and Practical Considerations

While federal tax law sets the baseline, some states impose additional requirements or allow limited flexibility. For instance:

  • Certain states require registration or filings if members wish to change their compensation structure.
  • Employment laws may apply differently if a member is treated as an employee for state unemployment or workers’ compensation purposes.
  • Drafting a clear operating agreement is crucial to avoid disputes about whether compensation is a return on investment or wages for services rendered.

Owners considering employee treatment should weigh not only federal tax implications but also payroll compliance, insurance coverage, and state-level labor requirements.

Frequently Asked Questions

  1. Can a member of an LLC be on payroll?
    Yes, but only if the LLC elects to be taxed as an S corp or C corp. Without this election, members are not considered employees.
  2. What is the difference between guaranteed payments and wages?
    Guaranteed payments are compensation to LLC members in a partnership-taxed LLC, taxed as self-employment income. Wages apply only if the LLC elects corporate taxation.
  3. Do LLC members pay self-employment tax?
    Yes, members typically pay self-employment tax on their share of profits or guaranteed payments, unless the LLC is taxed as a corporation.
  4. Why would an LLC elect S corporation status?
    Electing S corp status allows members to receive a salary (subject to payroll taxes) plus profit distributions (not subject to self-employment tax), potentially lowering tax liability.
  5. Can state law affect whether a member is an employee?
    Yes. While federal tax rules control classification, some states impose additional payroll, unemployment, or workers’ compensation requirements.

If you still find yourself wondering, can a member of an llc be an employee, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.