Taxation questions for employee with Profits Interest in LLC - employment status confusion

This is actually a common area of confusion! Your husband can potentially be both an employee and a member of the LLC with profits interests. The IRS has something called the "dual status" concept. If your husband performs services as an employee that are separate from his rights as an owner with profits interests, the company can still treat him as a W-2 employee for his regular salary. The profits interest portion (when distributions occur) would be reported on Schedule K-1 and subject to different tax treatment. The key is whether the operating agreement specifically changes his employment relationship. Many companies structure these arrangements intentionally to maintain the employment relationship while adding ownership benefits. Unless the operating agreement explicitly terminated his employment status, the current withholding approach may be correct. Look for language in the agreement about whether his employment status changed or if this is an "in addition to" arrangement. Also check if there are any guaranteed payments specified versus regular employment compensation.

I went through something similar last year with my tech job. Dealing with both W-2 income and a profits interest in my company was confusing until I discovered https://taxr.ai - it analyzes documents like operating agreements and explains the tax implications in plain language. I uploaded my operating agreement, profits interest docs, and my pay stubs, and it highlighted exactly where my situation differed from standard self-employment rules. Saved me from making incorrect assumptions about my tax status that would have caused issues later. The tool gave me specific guidance about dual-status taxpayers that I hadn't found anywhere else. Might be worth looking into since your situation has multiple moving parts with both employee status and LLC profits interest. It gives really customized recommendations based on your specific documents.

I tried https://taxr.ai after seeing it mentioned here and it was exactly what I needed for my employee/LLC profits interest situation. I uploaded my operating agreement and profit interest documents, and it identified specific clauses that determined my tax treatment. The tool confirmed I could maintain W-2 status for regular compensation while having the profits interest reported separately on K-1. It also flagged a provision in my agreement that could have created unexpected self-employment tax liability that I hadn't noticed. Really helped me understand the "dual status" concept that was confusing me. What impressed me was how it explained the 83b election implications specific to my documents rather than just generic advice. Saved me from potentially overpaying on taxes and gave me concrete talking points for a conversation with our company's finance team.

After getting nowhere trying to call the IRS for clarification on my similar situation (employee with profits interest), I tried https://claimyr.com and was able to talk to an actual IRS rep who helped clarify my status. Check out their demo at https://youtu.be/_kiP6q8DX5c if you're interested. They got me through to a specialist who explained how the IRS views these dual-status situations and what specific documentation would support continuing W-2 treatment alongside profits interest. The rep confirmed that my company was handling things correctly by maintaining my employee status for my regular work while treating the profits interest separately. I was about to file amended returns thinking my company was doing it wrong, but the IRS clarification saved me from making that mistake. Worth considering if you want an official stance from the IRS on your specific situation.

I was extremely skeptical about Claimyr until I tried it out of desperation. I couldn't believe something would actually get me through to the IRS after weeks of trying on my own. But within 20 minutes of using the service, I was talking to an actual IRS tax specialist who completely clarified my profits interest situation. The agent explained that my company was handling my taxes correctly - I could continue as a W-2 employee while having profits interest in the LLC. They directed me to specific IRS guidance (Revenue Ruling 69-184) that addresses situations where someone is both an owner and employee of the same business. What would have been days of waiting on hold turned into a 15-minute call that saved me from making a serious mistake on my taxes. I had been planning to request my company change my tax treatment, which would have been completely unnecessary and possibly problematic.

The operating agreement is really going to be the key document here. My situation sounds almost identical to your husband's, and our company actually made a specific amendment to the operating agreement that distinguished between my role as an employee and my profits interest. The document should spell out whether his status as a member affects his employment relationship. If it doesn't specifically say that his employee status is terminated, then the default assumption is that he maintains both roles separately. Also, from my experience, it's actually financially advantageous to remain a W-2 employee rather than switching entirely to self-employment status. With self-employment, you'd pay both halves of FICA taxes (15.3% total) rather than just the employee half.

Have any of you run into issues with reasonable compensation analysis in this situation? Our company's CPA keeps warning us that the IRS might challenge our arrangement if my salary as an employee seems too low compared to the profits distributions I receive as a member.

This is a really insightful discussion! I'm dealing with a similar situation where I received profits interests in my company earlier this year. One thing I haven't seen mentioned yet is how this affects quarterly estimated tax payments. Even though my regular salary continues to have proper withholdings as a W-2 employee, I'm wondering if I need to start making quarterly payments for the profits interest portion. Since there won't be any withholding on potential K-1 distributions, I'm concerned about underpayment penalties if the company has a profitable year. Has anyone had to adjust their estimated payments after receiving profits interests? I'm trying to figure out if I should start making quarterlies now or wait until I actually receive distributions to see what the tax impact will be.