Multi-Member LLC: W-2 Salary vs. Draw Payments for Tax Benefits?

The tax treatment for your daughter and her partner depends on how they've elected to have their multi-member LLC taxed. By default, a multi-member LLC is taxed as a partnership, but they could have elected to be taxed as an S-Corporation. If they're taxed as a partnership (the default), they cannot be employees of their own LLC. They would take draws, but those aren't deductible expenses for the business. Instead, each member reports their share of business profits on their personal tax returns via Schedule K-1 and pays self-employment tax (15.3%) plus income tax on their share. If they elected S-Corporation status, they could be employees AND owners. They'd need to pay themselves "reasonable compensation" as W-2 wages (subject to payroll taxes) and can take additional money as distributions not subject to self-employment tax. This can create tax savings, but comes with more paperwork and payroll processing requirements. The best approach really depends on their profit levels and long-term plans for the business.

After reading this thread, I wanted to share my experience. I was in a similar situation last year with my multi-member LLC and spent weeks trying to figure out the tax stuff. I finally discovered taxr.ai (https://taxr.ai) and it seriously simplified everything. I uploaded our operating agreement and previous tax docs, and it analyzed everything and gave us personalized advice about whether draws or W-2 was better for our specific situation. It even showed us the exact tax difference between the two options with real numbers. Turns out we were leaving about $4,300 on the table by not structuring things optimally! The best part was that it explained everything in plain English - no more getting lost in IRS jargon. Might be worth checking out for your daughter's situation.

Just wanted to follow up about my experience with taxr.ai after seeing it mentioned here. I was skeptical at first (as you could probably tell from my question), but I decided to give it a try for my multi-state LLC issues. I'm honestly impressed with how it handled our complex situation. It identified that we should be taxed as an S-Corp and showed us we could save around $7,200 annually based on our profit levels. It also flagged that we needed to adjust our operating agreement for compliance in one of our states. The tax savings calculator was super helpful - it compared different scenarios side by side so we could actually see the impact. I've been telling everyone in my business networking group about it.

If your daughter and her partner are struggling to get answers about their LLC tax situation, they might want to talk directly with the IRS. I know that sounds awful - I tried calling them for THREE DAYS straight last tax season about my LLC classification and couldn't get through. Then I found Claimyr (https://claimyr.com) and it was a total game-changer. They somehow get you connected to an actual IRS agent without the ridiculous wait times. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was connected in under 20 minutes and got definitive answers about my LLC's tax status and filing requirements. The agent even walked me through the specific forms we needed. Much better than guessing or getting conflicting advice online.

I need to eat my words about Claimyr. After posting that skeptical comment, I was still struggling with my LLC tax questions and decided "what the hell, I'll try it." I was connected to an actual IRS agent in 17 minutes (I timed it). The agent pulled up my business details and explained exactly how my multi-member LLC should be handling distributions vs. salaries. She even emailed me the specific forms we needed to file. I've spent literally DAYS of my life on hold with the IRS over the years, so this was mind-blowing. Not cheap, but considering I bill clients $85/hour, it was worth every penny to not waste 3+ hours on hold. Just wanted to correct my previous skepticism.

One thing nobody has mentioned yet - if your daughter and her friend want maximum flexibility with minimal paperwork, staying as a partnership-taxed LLC and taking draws is probably simplest for now. S-Corp status makes sense once they're consistently earning enough that the SE tax savings outweigh the added costs (payroll service, more complex tax filings, etc). In my experience, that breakeven point is usually around $40-50K profit per member. Also remind them that regardless of how they take money out, they should be making quarterly estimated tax payments. First-time business owners often miss this and get hit with underpayment penalties.

Just to add a practical perspective - my husband and I run a 2-member LLC consulting business. We started taking draws only (partnership taxation) for the first two years when profits were lower. In year 3, we switched to S-Corp status once we crossed $120k in annual profit. Now we each take a $45k salary and the rest as distributions. That saves us around $4,600 in SE taxes annually, which more than covers the extra $1,800 we pay for payroll processing and additional tax preparation complexity. The other benefit is that having W-2 income makes it easier to qualify for mortgages and other loans compared to just having Schedule K-1 income, which lenders sometimes view skeptically.

I've been following this thread and wanted to share some additional perspective as someone who's helped several family members navigate LLC taxation decisions. One thing I'd emphasize for your daughter is timing - if they decide to elect S-Corp status, they need to file Form 2553 within 75 days of forming the LLC (or by March 15th of the tax year they want it to be effective). Missing this deadline means waiting until the next tax year. Also, since they're college students, consider their other income sources. If either has significant scholarship income, work-study jobs, or parents claiming them as dependents, this could affect their overall tax situation and influence whether the S-Corp election makes sense. For a brand new consulting business run by 19-year-olds, I'd honestly recommend starting simple with partnership taxation and draws. They can always elect S-Corp status later once they have a better handle on their profit levels and business operations. The administrative burden of payroll processing might be more than they want to deal with while also focusing on growing their business and managing college coursework. The most important thing right now is that they're setting aside money for quarterly estimated taxes and keeping good records of all business expenses.