8643. Are partners and members of LLCs considered independent contractors or employees?Alexis Longrcline212014-07-07T22:22:00Z2014-07-07T22:22:00Z24782725Summit Business Media2263197148643. Are partners and members of LLCs considered independent contractors or employees?A general partner is treated as self-employed and income received from the partnership is, accordingly, treated as self-employment income..See IRC Sec. 1402(a). Income received by a limited partner, on the other hand, is generally not treated as self-employment income unless that income represents a guaranteed payment to the limited partner within the meaning of IRC Section 707(c)..IRC Sec. 1402(a)(13). A payment will be considered “guaranteed” under Section 707(c) if it is made without regard to the income of the partnership..IRC Sec. 707(c).If an LLC is taxed as a partnership, its members are treated as partners for tax purposes (including determining whether their income represents self-employment income)..Let. Rul. 9432018. Despite this, in the case of an LLC member, if a member who has contributed both services and capital to the organization receives a distribution, the distribution should represent self-employment income insofar as it relates to the services contributed by the member. The difficulty arises in determining whether a distribution relates to the services or a return of capital. The Tax Court recently held that payments received by a taxpayer through his LLC were guaranteed payments, rather than partnership distributions, that gave rise to ordinary income tax liability because the payments were made without regard to the partnership’s income and were made in exchange for the taxpayer’s services, not as a return of partnership capital.In this case, after the taxpayer’s employer refused to treat him as an independent contractor, the taxpayer resigned and formed an LLC through which he could perform the same services as a subcontractor for his former employer. The taxpayer received all payments for these services through the conduit LLC, which was taxed as a partnership, and labeled them as partnership distributions—arguing that the payments were made in exchange for the use of capital.The IRS disagreed with this characterization and instead reasoned that these payments represented guaranteed payments for services under IRC Section 707(c) and, therefore, generated ordinary income tax liability. The Tax Court agreed with the IRS, finding that the taxpayer here performed all services on behalf of the LLC, employed no employees and could not present any evidence that the payments, which were determined without regard to the partnership’s income, were made in exchange for the use of partnership capital. As a result, the taxpayer was required to include the payments in calculating his ordinary income tax liability. Seismic Support Services v. Comm., TC Memo 2014-78. While the IRS proposed regulations on the issue, in 1997 Congress provided that the regulations would not be made final and the IRS has not proposed further regulations..TRA 97, Sec. 935. Because of this, it is uncertain whether a distribution to an LLC member will be subject to the self-employment tax (see Q 8631) in a situation where the distribution cannot be apportioned to show whether it relates to the member’s services or capital contribution. Even in such a situation, the members of an LLC may still qualify as owner-employees for purposes of retirement plan qualification under the rules discussed in Q 8633.