Can an LLC member be a W-2 employee?
When you become an employee of your LLC, you must pay tax on the income and the LLC must withhold taxes for you. A W2 employee is what we normally think of as a typical, salaried employee. Unlike independent contractors, W2 workers are not their own business owners. They work for your company, participate in employee benefit programs, and work according to your business’s needs and schedule.
Corporation and LLC Taxation
A corporation is a legal entity separate from its owners. Owners who work for the company are required to receive a salary roughly in line with their duties. Compensation for owners who are treated as a corporation can be classified and withheld as W-2 income.
Employee vs Independent Contractor
Employers report employee wages using IRS Form W-2, while compensation for independent contractors is reported using Form 1099-MISC. Employees typically receive benefits like health insurance and retirement plans, whereas independent contractors are excluded from these benefits.
Equity Incentives in LLCs
Equity incentive plans for LLCs are becoming more common. LLCs can offer equity to employees and independent contractors, providing a way to motivate and compensate them similar to venture-backed startups.