I have formed a 2 member CA based LLC, in doing so, I was wondering can I put my spouse (who is a 10%) owner on Payroll?

My payroll company said it is not allowed, so I was just trying to check with you to get your opinion.

Thank you!

Generally speaking, the LLC members cannot take a payroll or a salary. Thus, they do not go on payroll and have taxes deducted from their salary and the LLC's are not subject to payroll taxes for the members's salary!

The usual method of taking out profits from an LLC are through a member distribution very similar to that of an S Corporation. This is accomplished by the LLC simply writing a check in the name of the member. The member is then able to deposit the check into his personal account and disburse the funds in any manner he wants and there is no tax at the source!

However, at the end of the tax year, the LLC's file a tax return and report a K-1 for each of its member, (the profit or loss allocation is based on partnership agreement). The net income as reported on the K-1 is generally subject to self-employment for its actively participating members.

So, the LLC member when filing his or her own tax return, is responsible for reporting his distributable share of the K-1 income/loss. In the case of a profit, a provision would have be made to ensure that sufficient estimated taxes have been paid to meet the LLC members self-employment tax liability along with regular tax on the net income reported on the K-1.

In practice, the LLC member would be advised to consult a CPA to ensure through careful planning that the tax liability has been met through estimated tax payments so as to avoid underpayment tax penalties and interest.

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Ask TaxGuru Please refer to the legal disclaimer.

A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business's income should be reported on form 1065