Denver Business Daily

Do you pay payroll taxes to partners in a California LLC?

There are four partners who work and all own a share of our California LLC. Do we pay taxes to the EDD for Payroll, or do we pay Self-Employment taxes at the end of the year, or do we do both? Note: The four partners are the only employees of the LLC.

Public Comments

1. No, an LLC distributes the profits among its members the partners of the LLC and each member pays their own taxes. This is one of the advantages of an LLC, no double taxation.
2. Members (what you refer to as "Partners") of LLC's are not considered employees, and thus do not pay payroll tax. Each member will be issued a K-1 at the end of the year w/ their share of the LLC's income/loss which each member will report on their own individual income tax return. The one thing to beware of is that LLC's in CA have a tax that is calculated on gross receipts and not net income. If your gross receipts are greater than $5M, you will be taxed $11,700, regardless of whether you actually have any net income. So if you are in that situation, there may be other entity structures that would provide more tax efficiency.
3. You need an accountant (I'm guessing the LLC isn't set up right, or would've been better off as a corp, too - e.g., there are no partners in an LLC; this is why I guess that). Compensation for services to LLC members is called a guaranteed payment, and is subject to self employment tax. My recollection is that payroll taxes do not apply. More commonly, however, guaranteed payments are not made, profits (losses) are distributed via K-1's instead. The other answers seem to assume this situation.