Avoiding Self-Employment (SE) Tax With LLC

Saving self-employment (SE) tax on the business earnings of a partner or sole proprietor can be significant, with rates from 2.9% to 15.3%. Partners in some cases have avoided this SE tax on their distributive share for an interest as a limited partner in a limited partnership (LP).

Today, however, LLCs are in much more common use than LPs for business and investment purposes. This makes it unfortunate that it’s still not clear that a passive member of an LLC can avoid the SE tax. Recently though, the Tax Court allowed limited partner treatment to a passive member of an LLC (the case was Hardy v. Commissioner.)

There are some steps you can take to help secure this treatment for your passive interest in an LLC and, depending on the circumstances, you may still want to go with an LP structure if this type of tax savings is particularly important.

If you’d like to further discuss your business structure or any other tax savings ideas, please contact us to speak with one of our attorneys.

** The information contained in this communication is not intended to constitute legal, accounting or tax advice.