For PA unemployment compensation (UC) tax purposes, a limited liability company (LLC) may be an employing entity like any other form of business entity. An LLC must pay UC contributions on wages paid to its employees.
The family exemption does NOT apply to LLCs. An LLC, like a corporation, is an artificial entity that does not have family relationships with any individuals.
UC Taxation of Members
Whether an LLC must pay UC tax on a member’s wages is determined by a review under the PA UC Law, as well as the Federal Unemployment Tax Act (FUTA). Each case must be reviewed on its own facts and merits.
Single-Member LLCs
The sole member of a single-member LLC is generally exempt from UC taxation under Section 4(l)(2)(B) of the PA UC Law because that member is free from direction and control and is customarily engaged in an independent business (i.e., the LLC).
However, the sole member of a single-member LLC may be subject to UC taxation depending on the LLC’s status for federal tax purposes. If the LLC accepts “disregarded entity” status for federal tax purposes, the sole member is self-employed for purposes of FUTA, and the member remains exempt from UC taxation under Section 4(l)(2)(B) of the PA UC Law. However, if the LLC has elected corporate status for federal tax purposes, its sole member is an employee under FUTA. In that circumstance, the LLC must pay UC taxes on the sole member’s wages under the “catch-all clause” in Section 4(l)(6) of the PA UC Law. Pursuant to the “catch-all clause”, if services constitute “employment” for FUTA, they also constitute “employment” under the PA UC Law.
Multi-Member LLCs
If a multi-member LLC is managed by its members and each member has equal rights in the management and conduct of the LLC’s business, the members may be exempt from UC taxation under Section 4(l)(2)(B) of the PA UC Law. However, the members may be subject to UC taxation under certain circumstances, including, but not limited to the following:
(1) Nominal Membership - Members of an LLC are employees when they participate in management of the LLC in name only, for example, when they have small percentages of ownership, with no or very limited management rights.
(2) Employee for FUTA – Members of an LLC are employees under FUTA if the LLC has elected corporate status for federal tax purposes and the members perform services for wages. In that circumstance, the LLC must pay UC taxes for its members under the “catch-all clause” in Section 4(l)(6) of the PA UC Law.
If you have questions regarding LLC member coverage, please contact UCTS.