Guidance for LLCs on self-employment taxes is on the horizon. In 1997, IRS issued proposed regulations saying a member’s share of an LLC’s income is exempt from SECA tax if the owner qualifies as a limited partner for tax purposes. Members are not limited partners if they are personally liable for the LLC’s debt, can sign contracts on behalf of the business, or put in more than 500 hours a year. Also, LLC owners who perform services in fields such as law, medicine and accounting are subject to SECA tax.
IRS has said that members who rely on these rules are safe. But semiactive LLC owners still aren’t sure how they exactly fit in within the rules. The Service plans to revisit this thorny issue. In its regulatory priority list, the agency announced that it is again looking at the application of SECA tax to LLCs.