[quote=harvey]
Still not following. It’s a standard practice to have a single member LLC and pay yourself on a W2, pay the rest as K-1 pass-through. There are payroll companies that specialize in that arrangement, as well as 401K providers, etc. I know many people that do it. I do it.
Looks like the new plan is going to limit the 25% rate on pass-through to 30% of income, so it’s not as huge a win for the little guy. And the benefits for my example of executives becoming consultants is probably overstated.
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I know there are companies that do it. I’m telling you, paying a LLC member on a W-2 is both flat out wrong and not common. I have never seen it for a single member LLC, unless the LLC has elected to be taxed as an S-Corp, where it’s mandatory and the only way to pay shareholder employees. The default for single member LLCs is that they are disregarded entities for tax purposes, unless an affirmative check-the-box election is filed. The law is that LLC members cannot be paid as employees (As a practical matter, there are only minimal adverse consequences of doing it wrong, but potentially, it could be pretty expensive if the IRS so chooses). Beyond that, there is zero advantage to doing it other than paying tax through withholding rather than estimated taxes. 401K rules are the same, irrespective of whether LLC members are paid incorrectly as W-2 employees or receive non-W-2 salaries (technically “guaranteed payments”)
The 70/30 rule is there, but unless i’m reading it wrong, unless income from an active business is over about $400 to 500K, it won’t save anything. The 30% will already be in a lower bracket anyway.
