Are all LLC members required to pay self-employment tax?

Many LLC members ask the question of whether or not they are required to pay self-employment taxes. Although an LLC has great benefits in combining the limited liability of corporations and the tax benefits of partnerships, it seems that there are still some unclear parts about the taxes section of the company.

Old rules of LLC self-employment taxes:

It used to be that you did not have to pay self-employment taxes because you were considered a limited partner. If you were not a manager and if you would have qualified as a limited partner in a limited partnership then you were considered a limited partner in the LLC and you would not have to pay self-employment taxes. This made very good sense.

Old rules of LLC self-employment taxes:

It used to be that you did not have to pay self-employment taxes because you were considered a limited partner. If you were not a manager and if you would have qualified as a limited partner in a limited partnership then you were considered a limited partner in the LLC and you would not have to pay self-employment taxes. This made very good sense.

Because the LLC was a combination of a partnership and a corporation it would seem that the rules of both would apply to the LLC. So if you were considered a limited partner under the rules of a limited partnership it would seem that you would be considered a limited partner under the rules of an LLC.

If you were considered a limited partner you would not have to pay the self-employment tax. Only the managers would be required to pay this tax. Since the run the business and make all the decisions for the business it makes sense that they would be the only ones paying the self-employment tax. But, even though this seemed like a great way to decide whether or not you had to pay the self-employment tax, the rules eventually changed.

New rules of LLC self-employment taxes:

These rules soon changed and have more specific regulations. Where before they were more general, if you were not a manager you did not pay self-employment, the regulations now became much more detailed. It became harder to be considered a limited partner.

Under the new rules you are considered a limited partner unless you (1) have personal liability for debts in the partnership, (2) if under the law you have authority to make contracts on behalf of the partnership and (3) if you have participated in the trade or business for 500+ hours during the tax year.

If the reason you could not meet the requirements was only because you failed to meet the requirements found in number three then there are exceptions for you. You can still be considered a limited partner if you only have one class of interest. In addition to this there has to be other partners who own a large amount of interest in the same area in which you do. You also have to have the same rights and obligations as the other partners owning that type of interest.

These rules are much more complicated than the original rules. They can be confusing because of all the rules and exceptions to rules. They can be confusing because of the specific nature of all the rules. But these are the rules.

If you fit into these rules then you are considered a limited partner and you do not have to pay self-employment tax. Otherwise you cannot get out of it and you have to pay it. If you do not fit these rules it would seem that you play to big of a role in the business not to be considered as one being self-employed.

If you do not want to have to worry about these regulations then you might consider being something other than a limited liability company. You might consider being just a limited partnership. But the benefits of an LLC may outweigh the hard self-employment tax regulations. You would have to consider your business and make the best choice for you.