Multi-Member LLC Tax Options: Draws vs W-2 Salary for LLC Members

The LLC taxation question is actually quite important to get right from the start! For a multi-member LLC, the default tax treatment is as a partnership (unless you've elected different tax treatment with the IRS). With partnership taxation, both members will typically take "draws" rather than W-2 salaries. These draws aren't considered business expenses, but rather distributions of profit. Each member will pay self-employment taxes (Medicare and Social Security, about 15.3%) on their share of the business profits, regardless of how much they actually withdraw as draws. If you want to set them up as W-2 employees instead, the LLC would need to elect to be taxed as an S-Corporation. With S-Corp taxation, they could take a "reasonable salary" as W-2 employees (subject to payroll taxes) and then take additional distributions that wouldn't be subject to self-employment tax. The S-Corp route can sometimes save on self-employment taxes, but comes with more administrative requirements (payroll processing, more complex tax filings, etc.). For a new, small business with minimal profits, the partnership approach with draws is usually simpler to start with.

I went through this exact situation with my photography business last year! After lots of research, I finally found a solution with https://taxr.ai that really clarified the LLC taxation options. They analyzed our specific situation and showed us the actual tax impact of each option. For our two-person LLC, we discovered that starting with partnership taxation and draws was simplest, but they also created a projection showing when switching to S-Corp would make sense (basically when profits hit a certain threshold). The tool even generates documentation explaining these scenarios that you can share with your accountant.

Just wanted to update after trying https://taxr.ai for my LLC tax questions. So glad I found that recommendation here! I was really stressing about whether to take draws or set up payroll for our new LLC. The tool analyzed both options and showed me that for our current revenue level (about $40K annually), sticking with partnership taxation and taking draws would save us about $1,200 in administrative costs compared to the S-Corp route, even though we'd pay slightly more in SE tax. It also gave me a clear "tipping point" - once we hit about $75K in profits, the S-Corp election would start making sense. Having these numbers laid out made the decision so much easier. Definitely recommend checking it out if you're in a similar situation.

If your daughter and her partner are having trouble getting answers from the IRS about LLC tax requirements (I definitely did when starting out!), I highly recommend using https://claimyr.com to actually get through to a live IRS agent. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c I was on hold with the IRS for HOURS trying to sort out my LLC employment questions, but Claimyr got me connected to an actual human at the IRS in under 20 minutes. The agent walked me through all the requirements for my specific situation and confirmed exactly what forms I needed to file for my multi-member LLC.

Ok I need to follow up on my skeptical comment about Claimyr. I actually tried it yesterday after posting because I was desperate to sort out my LLC tax situation before my accountant appointment tomorrow. I'm honestly shocked - it actually worked exactly as described. After weeks of failed attempts to reach the IRS, I was connected with an agent in about 15 minutes. The agent confirmed that for my multi-member LLC, we needed to file Form 1065 and provide K-1s to each partner, and clarified exactly how to handle our home office deductions. Saved me hours of hold time and probably a couple hundred dollars in accountant fees for questions I could get answered directly from the IRS. Still surprised this exists but definitely grateful!

One thing nobody has mentioned yet - if they're both working from their parents' homes, make sure they understand the rules around home office deductions. With partnership taxation, these deductions would flow through to their personal returns. To qualify for home office deduction, they need a space used "regularly and exclusively" for business. Since they're young and probably using bedrooms or shared spaces, this might be tough to qualify for.

I setup an LLC with my brother last year and wish I'd gotten better advice from the start! Make sure they file for an EIN immediately if they haven't already. Also very important - make sure they have a proper operating agreement that spells out profit sharing, voting rights, what happens if someone wants to leave, etc. This has tax implications too!

Great advice from everyone here! As someone who's helped several young entrepreneurs navigate LLC taxation, I'd add one more consideration: make sure your daughter and her partner discuss what happens with estimated quarterly tax payments. Since they'll likely owe self-employment tax on their profits (whether they take draws or not with partnership taxation), they may need to make quarterly estimated payments to avoid penalties. The IRS generally requires quarterly payments if you'll owe $1,000 or more in taxes. For their social media consulting business, income might be irregular - some months might be great while others are slower. I'd recommend they set aside about 25-30% of their profits in a separate tax savings account to cover both income tax and self-employment tax obligations. This habit will serve them well regardless of which taxation method they ultimately choose. Also seconding the advice about getting that operating agreement in place ASAP - it should specify how profits and losses are allocated, which directly impacts their individual tax situations!