An active member of an LLC cannot receive W-2 income. This is because an active member is not considered an employee. The only exception is if an LLC elects to be taxed as a corporation.
A member of an LLC taxed as a partnership cannot be an employee. Any payment to members is a guaranteed payment, which is self-employment income for the member.
For single-member LLCs, owners can take draws from profits. Multi-member LLCs require owners to take salaries meeting IRS requirements, in addition to draws.
The owner of an LLC taxed as an S corporation can receive W-2 income if they are also an employee. In this case, they are paid a salary, and the business withholds taxes, while the business income passes through to the owner’s tax return.
If the LLC member owns 5% and is active, they cannot be a W-2 employee. They would receive guaranteed payments and have to pay both halves of self-employment tax. If the LLC elects corporate taxation, then the member could become a W-2 employee.
Deciding between a W-2 employee or a 1099 worker? A W2 individual is a formal employee who receives a W-2 tax form annually, detailing wages earned and taxes withheld. A 1099 worker is typically an independent contractor who receives a 1099 form that records the payment made to them by a client but lacks deductions for taxes.
However, if an LLC is taxed as an S corporation, it will not receive a form 1099. For income tax filing with the IRS, you should know how and when to issue or get a 1099. Not all LLCs get a 1099; it depends on the business structure and Limited Liability Company type.
Both the Form W-2 and Form 1099 serve to report income you earned from sources throughout the tax year, but each is issued under different circumstances and requires slightly different approaches for tax season planning.