My absolute favorite writer on the topic of taxes, Tony Nitti, has written the clearest and most informative article on the topic of LLC member income and its related tax issues that I’ve seen yet.  I’ve excerpted this one question and its answer as a summary, but if you prepare LLC returns or you are a member of an LLC, do yourself a favor and read the whole article.  It’s concise, explanatory, entertaining, and a treasure trove of info.

Q: So what does this mean? Is the distributive share of all LLC members now subject to self-employment tax?

A: I wouldn’t go that far. This ILM was specific to the taxpayer, but there are certainly lessons to be learned. If the LLC’s members provide significant services to the LLC, and it is those services that give rise to the majority of the LLC’s income, it is clear that the IRS is going to be prepared to argue that the LLC members are not limited partners for purposes of the exception from self-employment income found at IRC Section 1402(a)(13). You may want to have a strong defense ready to go, or else be prepared to have a hard conversation with your LLC member clients in the next few days explaining why income that has not been subject to self-employment income in the past is subject to self-employment tax on their most recent tax return.

Source: IRS: Partners’ Share Of LLC Income Is Subject to Self-Employment Tax – Forbes