How does a co-op structured as an LLC affect members’ individual taxes?

Let’s examine the issue of self-employment tax in worker-owner co-ops structured as LLCs or as cooperative corporations. This can get complicated quickly, and there are lots of confusing elements, but we will try to break it down simply. It’s important to remember that in addition to personal income tax, LLC members who are not “employees” but worker-owners have to pay self-employment tax (which is around 15%) on all their earnings plus personal income tax on their earnings (although they do get to deduct an amount equal to half of the self-employment tax from their earnings, because it is a business expense). A co-op set up as a corporation, however, only has to pay employment tax on members’ wages and then individuals pay personal income tax on their wages and patronage dividend. Given that the self-employment tax is over 15% (although half of it is deductible for an LLC member), this can make a big difference. Let’s look at a couple of examples to see the implications.

Read the full article at the Cooperative Development Institute


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