When forming or running a Limited Liability Company (LLC), one question that often comes up is: “Can a member of an LLC also be an employee?”
The answer depends on how the LLC is structured — whether it’s a single-member or multi-member LLC, and whether it’s taxed as a partnership, corporation, or disregarded entity.
In this article, we’ll explain:
- The difference between members and employees
- When an LLC member can be treated as an employee
- IRS rules and tax implications
- Alternatives to employee classification for LLC members
What Is an LLC Member?
An LLC member is an owner of the LLC. Members can be individuals, corporations, other LLCs, or even trusts. They have rights to:
- Share in profits and losses
- Make management decisions (unless the LLC is manager-managed)
- Receive distributions from the company
What Is an Employee?
An employee is someone who works for a company and receives W-2 wages. The employer is responsible for:
- Withholding income tax
- Paying Social Security and Medicare (FICA) taxes
- Issuing a W-2 at the end of the year
So, Can an LLC Member Be an Employee?
Here’s a breakdown based on LLC structure and taxation:
1. Single-Member LLC (Default Disregarded Entity)
A single-member LLC is treated as a disregarded entity for tax purposes. The IRS does not recognize the member as an “employee” of the LLC.
- You cannot pay yourself a W-2 wage
- You take profits as owner’s draw (not salary)
- Income is reported on Schedule C (Form 1040)
Exception: If you elect to have your single-member LLC taxed as an S Corporation or C Corporation, you can be an employee.
2. Multi-Member LLC (Default Partnership Taxation)
In a multi-member LLC taxed as a partnership:
- Members are treated as partners, not employees
- Members cannot receive W-2 wages
- They receive guaranteed payments or profit shares
- Self-employment taxes apply
Again, members can be employees only if the LLC elects to be taxed as an S Corp or C Corp.
3. LLC Taxed as an S Corporation
If your LLC elects S corporation status by filing IRS Form 2553:
- Members who work in the business can be treated as employees
- They must receive “reasonable compensation” via W-2
- Payroll taxes must be withheld and paid
- Profits beyond salary can be distributed as dividends (which may reduce self-employment tax)
4. LLC Taxed as a C Corporation
If your LLC elects C corporation taxation:
- Members can be employees
- W-2 wages are required for services provided
- The LLC pays corporate income tax separately from the owners
Why Classification Matters
Misclassifying a member as an employee (or vice versa) can lead to:
- IRS penalties
- Back taxes and interest
- Disallowed deductions
- Payroll tax issues
Real-Life Example
Three friends form a multi-member LLC to start a marketing agency. They each contribute capital and work full-time in the business. Since the LLC is taxed as a partnership by default, they cannot pay themselves W-2 wages. Instead, they receive guaranteed payments and their share of profits.
Later, they elect S corporation status, allowing them to pay each partner a reasonable salary as employees and take remaining profits as distributions.
Summary Table:
| LLC Type | Can Member Be an Employee? | W-2 Allowed? | Tax Treatment |
|---|---|---|---|
| Single-Member (Default) | No | No | Disregarded Entity (Schedule C) |
| Multi-Member (Partnership) | No | No | Partnership (Form 1065, K-1) |
| LLC Taxed as S Corporation | Yes | Yes | S Corp (Form 1120S, W-2, K-1) |
| LLC Taxed as C Corporation | Yes | Yes | C Corp (Form 1120, W-2, 1099-DIV) |
Final Thoughts
A member of an LLC can be an employee only if the LLC elects to be taxed as an S Corp or C Corp. In default tax structures (sole proprietorship or partnership), members are considered owners — not employees — and cannot receive W-2 wages.
If you’re looking to combine ownership with active employment in the business (and want to reduce self-employment taxes), electing S corporation status may be the best route.
At FormLLC, we help small business owners choose the right LLC structure, make tax elections, register EINs, and stay compliant with IRS and state laws.
