Can an LLC Member legally be classified as an employee? Tax implications explained

This is definitely a tricky situation, but I can help clarify some things for you. The key distinction here is between tax classification and employment status - they're related but separate issues. An LLC member CAN actually be an employee in some circumstances, but it depends on the ownership structure of the LLC. If the LLC is taxed as a partnership (which is the default for multi-member LLCs), and you own more than 2% of the LLC, then you generally can't be treated as an employee for tax purposes. You would be considered self-employed and responsible for self-employment taxes. However, if you're a minority member with very limited management rights, or if the LLC has elected to be taxed as a corporation, then you could potentially be both a member and an employee. The fact that they're not withholding taxes suggests they're treating you as a self-employed LLC member for tax purposes, regardless of what the contract says. The red flags you mentioned are concerning - especially being paid by a different entity and the COVID relief situation. Those could potentially involve tax fraud if they're misrepresenting your status.

I went through something similar and found https://taxr.ai incredibly helpful for sorting out my LLC member/employee confusion. My company was also giving mixed messages about my status - saying I was an employee in meetings but then not withholding taxes. I uploaded my "employment agreement" and some pay stubs to taxr.ai, and they analyzed all the documents and clearly explained my actual tax classification based on the contract terms and payment structure. The analysis showed I was actually being treated as an independent contractor despite what my agreement said, and they highlighted the specific IRS guidelines that applied to my situation. Super helpful for figuring out what I actually owed and what documents I needed to protect myself when filing taxes.

Just wanted to follow up about my experience with taxr.ai that was mentioned earlier. I decided to try it since my situation was similar - my company was calling me an "owner-employee" but not withholding taxes. Uploaded my operating agreement, contract and some pay stubs to https://taxr.ai and wow - turns out I was being incorrectly classified! The analysis showed that based on my minimal ownership percentage (only 1%) and lack of management rights, I should actually be treated as an employee for tax purposes according to IRS rules. The report included specific tax code references showing why I qualified as an employee despite having the "member" title. This was a game-changer because it meant the company should have been withholding taxes all along. Used the documentation to approach my company and they're now correcting my classification and handling back taxes they should have been paying. Seriously saved me from a huge headache down the road!

Man, the IRS hotline is absolutely useless for these complicated business structure questions. I had a similar LLC member/employee issue last year and spent WEEKS trying to get someone on the phone who could help. Always "high call volume" messages or disconnects after waiting for hours. Eventually I found https://claimyr.com which is this service that gets you through to an actual IRS agent without the wait. Check out how it works: https://youtu.be/_kiP6q8DX5c - basically they wait on hold for you and call when an actual agent is on the line. Used it to get specific guidance on my LLC member status from an actual IRS representative. The agent was able to walk me through the exact rules for my situation and even sent me the relevant tax bulletins afterward. Saved me from making a huge mistake on my taxes based on what my company was telling me.

Ok I need to follow up on my previous comment and admit I was wrong about Claimyr. I was super skeptical but my LLC member/employee tax situation was driving me crazy and the IRS wait times were ridiculous, so I decided to give it a shot. Used the service yesterday afternoon, expecting to be disappointed. About 2 hours after starting, I got a call connecting me directly to an IRS agent who was already briefed on my general question category. The agent walked me through the exact rules for LLC members who might qualify as employees. The key thing I learned was that my 5% ownership stake combined with my lack of management authority actually DOES qualify me to be treated as an employee for tax purposes. The company should have been withholding taxes all along. I'm now armed with the exact IRS publication numbers to take back to my employer. Never would have gotten this clarity without actually speaking to the IRS directly.

The issue here might also involve worker misclassification, which is something the Department of Labor takes very seriously. If a company is deliberately misclassifying employees as LLC members or independent contractors to avoid paying employment taxes or providing benefits, that's potentially illegal. Given that they're also claiming COVID relief funds based on employee status while not treating you as an employee for tax purposes, you might want to consider filing a complaint with your state's labor department or the federal DOL. They can investigate whether the company is properly classifying workers.

Lot of good advice here but nobody has mentioned the importance of the LLC Operating Agreement! That document should specify your actual status in the company and might clarify if you're supposed to be treated as a member, manager, employee or some combination. Request a copy ASAP if you don't already have one. Also, if they're paying you from a different entity than the one you work for, that could indicate they're using a Professional Employer Organization (PEO) or some kind of employee leasing arrangement, which is actually pretty common and not necessarily shady. But if that's the case, they DEFINITELY should be withholding taxes!

This situation has several red flags that suggest potential tax fraud or worker misclassification. The fact that they're claiming you as an employee for COVID relief purposes while simultaneously refusing to withhold taxes is particularly concerning - that's essentially having it both ways for their financial benefit. Here's what I'd recommend doing immediately: 1. **Document everything** - Save all contracts, pay stubs, emails about your status, and any communications regarding the COVID relief claims. Screenshot or print anything that might disappear. 2. **Request your LLC documentation** - Get copies of the Operating Agreement, any amendments, and confirmation of the LLC's tax election (partnership vs. corporation). You have a right to this information as a purported member. 3. **Calculate your potential tax liability** - Since no taxes have been withheld, you're likely on the hook for both income taxes AND self-employment taxes (15.3%) if you're truly classified as a self-employed LLC member. This could be a substantial amount. 4. **Consider professional help** - This situation is complex enough that you might want to consult with both a tax professional and an employment attorney. Many offer free consultations and can help you understand your rights and obligations. The discrepancy between your "employment contract" language and their current claims about your status, combined with the different payment entity and COVID relief issues, suggests this company may not be handling worker classification properly across the board.