Pennsylvania Held that LLC Member Payments are Subject to Unemployment Tax
November 19, 2015
The Commonwealth Court of Pennsylvania held in King’s Kountry Korner, LLC v. Department of Labor and Industry, Office of Unemployment Compensation Tax Services, that guaranteed payments made to members of an LLC for services rendered are subject to Pennsylvania unemployment tax because the members of the LLC are considered employees of the LLC.
King’s Kountry Korner, an LLC, operated two furniture stores in Pennsylvania. The managing member owned 90-93% of the company while the other 7-10% was divided between 10 other members. Kountry Korner filed partnership tax returns from 2008 through 2011 and reported the amounts paid to the members as “guaranteed payments.” For federal and Pennsylvania income tax purposes, guaranteed payments are not considered wages and, further, a partner in a partnership or member of an LLC is not considered an employee of the partnership or LLC for income tax purposes.
However, the Court stated that Pennsylvania unemployment compensation law is broad and once it is determined that an individual performed services for compensation, that individual is presumed to be an employee. It is then up to the employer to prove that an exemption applies or that the members are not employees. The court stated that Kountry Korner did not present any evidence that the members were not employees.
It is advisable for any LLC in Pennsylvania that is making guaranteed payments to a member for services rendered should evaluate whether those payments are subject to unemployment tax.