I went through this exact situation with my consulting LLC last year. The short answer is no - multi-member LLCs cannot be treated as disregarded entities under any circumstances. The IRS is very clear that disregarded entity status is only available for single-member LLCs. Your default classification is partnership taxation (Form 1065), but you're absolutely right to explore other options. At your income level, an S-Corp election could save you significant money on self-employment taxes. Here's what I learned: 1. With partnership taxation, both members pay self-employment tax on their entire share of profits 2. With S-Corp election, you only pay employment taxes on reasonable salaries, not on distributions For a $125k business, if you each took $40k salaries and split the remaining $45k as distributions, you'd save about $3,400 in SE taxes annually (15.3% × $45k). The tradeoff is quarterly payroll filings and more complex bookkeeping. I'd strongly recommend running the numbers with a CPA before deciding. The breakeven point where S-Corp election makes sense is usually around $60-80k in profits, so you're definitely in the range where it could be beneficial.

Based on everyone's helpful responses here, I wanted to share what we ended up deciding for our multi-member LLC situation. After running the numbers and consulting with our CPA, we're moving forward with the S-Corp election since we're projected to hit $125k this year. The key factors that convinced us were: 1) The potential SE tax savings of around $3,500-4,000 annually at our income level, 2) The fact that we can keep our LLC structure and just change the tax classification, and 3) Our CPA confirmed that reasonable salaries for marketing professionals in our area would be around $45k each, leaving $35k in distributions that wouldn't be subject to SE taxes. We're planning to use QuickBooks Payroll to handle the compliance side since it's much cheaper than hiring a payroll service at our size. Thanks to everyone who shared their experiences - it really helped us make an informed decision! Will report back in a year with how it actually worked out in practice.

I've been following this thread with great interest since I'm in a somewhat similar situation. One aspect that might be worth exploring is whether your employer offers any flexibility in how the lump sum is categorized or structured. For instance, some companies can separate out different components like accumulated vacation time, severance pay, and early retirement incentives, which might have different tax implications. Even if the total amount is the same, having clarity on how each piece is reported could help with your tax planning. Also, since you mentioned you're weighing early retirement vs severance, consider the long-term implications beyond just this year's taxes. Early retirement might give you more control over your income timing in future years - you could potentially do Roth conversions at lower tax rates, harvest capital losses, or implement other strategies when you're not earning a regular salary. The advice about maxing out your 401(k) and HSA contributions is spot-on. Given that you have significant contribution room left and this windfall to cover expenses, this really is an ideal situation to shelter a large portion of that income from taxes. Even if you can't avoid all the tax impact, every dollar you can shift to pre-tax savings is money in your pocket. Have you considered consulting with a fee-only financial planner who specializes in retirement transitions? They might help you see the bigger picture beyond just minimizing this year's tax bill.

Based on all the excellent advice in this thread, I wanted to add one more consideration that could be significant for your situation. Since you're deciding between early retirement and severance, and given the substantial tax optimization opportunities discussed here, you might want to ask your employer about the possibility of structuring part of the payment as a contribution to a non-qualified deferred compensation plan if they offer one. Some companies, especially during restructuring, have flexibility to offer departing employees the option to defer a portion of their lump sum payment to future years when you might be in lower tax brackets. This isn't the same as a 401(k) contribution, but it can achieve similar tax deferral benefits. Also, given that you're in your mid-50s and this is a substantial windfall, consider whether this changes your overall retirement timeline and tax strategy. If this payment allows you to retire earlier than planned, you might benefit from doing a detailed analysis of optimal withdrawal strategies from different account types (traditional vs. Roth IRA, taxable accounts, etc.) in your early retirement years. The combination of maxing your 401(k) ($23,000 remaining room), HSA contributions, potential charitable giving bunching, and strategic timing could significantly reduce your tax burden. But as others have noted, the long-term planning implications might be even more valuable than the immediate tax savings. A comprehensive approach that considers both this year's optimization and your overall retirement strategy would be ideal.

I've been reading through this entire thread and it's been incredibly helpful! I'm dealing with the exact same situation - got an EIN for a business partnership that fell through before we ever did anything with it. No bank accounts, no state registration, literally nothing except that EIN sitting in some IRS database. What I appreciate most about this discussion is how everyone who's actually been through this situation has shared their real experiences rather than just guessing. The consensus seems pretty clear: no activity means no filing requirement, but several of you have made a compelling case for filing a zero return anyway just for peace of mind and documentation. I think I'm going to follow the lead of @Danielle Mays, @Tyler Lefleur, and others who went the "better safe than sorry" route. Even though it's not technically required, spending a little time on a zero return seems like such a small price to pay to eliminate any future uncertainty. Plus having that official record with the IRS that they've accepted showing zero activity gives me way more confidence than just hoping I interpreted the rules correctly. Thanks to everyone who shared their experiences - this thread should definitely help anyone else who finds themselves with an unused EIN!

This thread has been such a lifesaver! I got an EIN about 8 months ago for a freelance design business I was planning to start, but then I landed a full-time job that I love and never pursued the business idea. I've been carrying this low-level anxiety about that unused EIN ever since. Reading through everyone's real experiences here is so much more helpful than the generic advice you find elsewhere online. The fact that multiple people have confirmed with actual IRS agents that unused EINs don't create filing obligations when there's zero activity is really reassuring. I'm definitely going to follow the approach that @Danielle Mays, @Tyler Lefleur, @Dmitry Sokolov and others have taken - filing a zero return even though it's not technically required. The peace of mind argument is so compelling, and hearing that the IRS processed these returns normally without any questions makes me feel confident it's the right move. Thanks everyone for sharing your actual experiences rather than just speculation. This community is incredibly helpful for navigating these confusing situations!

The real issue here that nobody has mentioned is properly documenting your time! If you get audited and claim REPS, the IRS will want to see detailed logs of how you spent those 750+ hours. I learned this the hard way. Keep a detailed diary or use a time-tracking app specifically for your real estate activities. Document date, time spent, and exactly what you did. This includes time spent as a realtor if you're claiming those hours toward your REPS qualification.

Based on what you've described, you likely DO qualify for REPS, but your accountant is right that it's more complicated than it initially appears. Your realtor hours absolutely count toward the 750+ hour requirement - that's established case law. The IRS considers all real estate activities together for this test. So between your full-time realtor work and managing those 2 local properties, you should easily meet the hour threshold. However, the material participation requirement is evaluated separately for each property or group of properties. This is where the grouping election mentioned by others becomes crucial. You can elect to treat all your rental properties as a single activity on Form 8582. Once grouped, you only need to materially participate in the group as a whole, not each individual property. Even with property managers, you likely spend time on oversight activities - reviewing financial reports, approving major repairs, making strategic decisions about rent increases or tenant screening, etc. All of this counts toward material participation hours if properly documented. I'd suggest getting a second opinion from a CPA who specializes in real estate taxation. Many general accountants aren't familiar with the nuances of REPS and grouping elections. The tax savings potential here is significant enough to warrant consulting with a specialist.

This thread has been incredibly helpful! I'm dealing with a similar situation with my 22-year-old son who's in his senior year of college. He's taking 12 credits (full-time at his school), I pay his tuition and rent, and he works about 15 hours a week making around $8,000 annually. One thing I wanted to add that I learned from my tax preparer last year - make sure you understand how the American Opportunity Tax Credit interacts with claiming your child as a dependent. You can only claim the education credit if you're also claiming them as a dependent. So even if the dependency exemption itself doesn't save you much in taxes, the education credits (up to $2,500 per student) can be substantial. Also, for those tracking support expenses, don't forget to include the fair market value of housing if your child lives at home with you. The IRS has guidelines for calculating this - it's usually based on what it would cost to rent a similar room in your area. This can significantly boost your support calculation if your child is living at home rent-free. Has anyone had experience with how this works when your child graduates mid-year? My son graduates in May, so I'm wondering if that affects his student status for the full tax year or just the months he was enrolled.

This has been such an informative discussion! As a tax professional, I wanted to add a few clarifications that might help others in similar situations. First, regarding the "5 months full-time student" rule - it's important to note that this refers to any 5 months during the tax year, and they don't have to be consecutive. So even if your child takes a semester off but was full-time for fall and spring semesters, they likely still meet this test. Second, I see some confusion about income limits. For qualifying children (under 24 and full-time students), there is NO income limit that disqualifies them from being your dependent. The $5,000 limit only applies to qualifying relatives. However, if your child's income is high enough that they're required to file their own return, make sure you coordinate so both of you don't claim the same person. One thing that hasn't been mentioned much is the "tie-breaker" rules when multiple people could potentially claim the same dependent. If parents are divorced or separated, there are specific rules about which parent gets to claim the child that go beyond just who provides more support. Also, keep in mind that some states have different rules than federal, so if you live in a state with income tax, double-check their dependency requirements as well. For anyone still unsure about their specific situation, I'd recommend consulting with a qualified tax professional rather than relying solely on online tools, especially for complex family situations.