How does the self employment tax work for a limited liability company?

Only limited liability companies that operate an active trade or business and which are treated as sole proprietorships or partnerships for tax accounting purposes get subjected to self-employment tax. In comparison, a limited liability company that is holding passive investments (like real estate) and which is treated as a disregarded entity or as a partnership doesn't subject the LLC members to self-employment taxes. Furthermore, note that a limited liability company that has elected to be treated for tax accounting purposes as an S corporation or a C corporation doesn't subject the LLC members (owners) to self-employment tax.

An S corporation or C corporation will owe equivalent Social Security and Medicare taxes on wages paid to shareholder-employees, however. Self-employment taxes owed by a sole proprietorship LLC or a partnership LLC can be substantial. As a rough approximation, in the case of a single-member limited liability company operating for tax purposes as a sole ... more.

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