As a member of an LLC, how do I pay myself a salary? 1099 or W-2?

If you are a member (part owner) of an LLC and you receive a "salary", this is a special thing, according to the IRS, it's called a Guaranteed Payment.

This article has a pretty good summary:

Guaranteed payment is a specific term in the Internal Revenue Code, which is defined as payments to a partner in his or her partner capacity for services or the use of capital if determined without regard to the income of the partnership. The courts have determined that a partner is acting in his or her capacity as a partner when he performs services that are ongoing and integral to the business of the partnership.

What all that gobble-de-goop means is that any regularly scheduled payment to a member of an LLC for services rendered that is not predicated on the LLC's income, such as in the case of salary, should be treated as a guaranteed payment.

This is an IRS concept, so it's federal, not state. You'll only need a single EIN for the LLC to pay all the employees who are not members. "FEIN" is just short for "Federal EIN" (Employer ID Number).

VPIDOVA, I think you can find some answers to your questions in this article: http://www.entrepreneur.com/money/taxcenter/taxdeductions/article30062.html

What all that gobble-de-goop means is that any regularly scheduled payment to a member of an LLC for services rendered that is not predicated on the LLC's income, such as in the case of salary, should be treated as a guaranteed payment.

The good news for the LLC is that guaranteed payments are deductible by the LLC as business expenses and the net profit of the LLC is reduced by that amount. The bad news for the member receiving the guaranteed payment is that the payment is treated as ordinary income.

As ordinary income, guaranteed payments aren't subject to income tax and FICA tax withholding as a salary would be; instead, guaranteed payments are subject to estimated income taxes and self-employment taxes. What this means is that the LLC saves on FICA taxes but the member has to carry the burden of self-employment taxes.

Another important consideration is if premiums for health insurance are paid by the LLC on behalf of a member for services rendered, then those premiums are also treated as guaranteed payments. Guaranteed payments have other ramifications relative to the member's capital account in the LLC (especially if the LLC is losing money) that are beyond the scope of this column. Seek help from your tax advisor to sort out all the intricacies in your situation.

Some folks have tried to get around the guaranteed payment rules by using distributions from an LLC instead. Distributions are generally made relative to prior or current year's earnings, or in liquidation of a member's interest or the LLC, whereas guaranteed payments are made irrespective of earning considerations. Cash distributions are generally treated as a return of the member's capital or previously taxed income. It gets complicated at this point. Using cash distributions to pay salary exposes you to the risk that the IRS may reclassify the distribution as a guaranteed payment and subject the payments to self-employment taxes, penalties and interest.

Vpidova, you can get paid as an employee and that can be deducted as an expense from your corporation or LLC.

You want to limit how much you pay yourself as an employee because you will be subject to medicare and social security on both ends, as an employee and the employer. Your CPA will tell you the right amount for your business. It has to be a reasonable salary you give yourself. They refer to it as "self employment tax"

The good thing about paying yourself through payroll, is that if you ever need to qualify for a home or auto loan you dont have to break out the old tax returns (usually)