Self-Employment Tax and NIIT for LLCs and High Income Individuals

The NIIT, also known as the 3.8 percent Medicare tax, applies to the net investment income of individuals in upper-income brackets and is generally viewed as an alternative to employment taxes on earned income. However, uncertainty regarding self-employment income and the impact of the NIIT on LLC members and limited partners continues to create confusion.

This area of the Code offers challenges and unique planning opportunities because of the continued uncertainty regarding applying self-employment tax to income earned by an LLC member and the potential application of NIIT to LLC income that escapes the reach of the self-employment tax. This program will discuss ways in which business owners can restructure activities to wholly or partially avoid self-employment tax and the NIIT.

Listen as our panel of federal tax experts outlines proactive planning strategies for minimizing the NIIT as it applies to income from LLCs and other pass-through entities.

1. Introduction
   • FICA and SET basics
   • NIIT basics
2. Members and self-employment tax
   • The limited partner exception
   • Case law and rulings
3. LLC members and NIIT
   • Rental real estate activities: real estate professionals
   • The limited partner material participation problem
4. Trusts and estates
5. Planning problems and opportunities
   • The problem with S corporations and S corporation blockers
   • Properly structured LLC and LPs
   • Effect of grouping activities
   • Self-charged interest and rent
   • Avoiding NIIT through material participation and significant participation
   • Net gain from dispositions
   • Other strategies to minimize NIIT
6. Tax reform proposals

The panel will review these and other vital issues:

• Interpreting the gaps in IRS regs using recent case law to confirm whether self-employment tax applies to limited partners
• Application of the NIIT to real estate activities and LLC members generally
• NIIT tax mitigation strategies for trusts and estates
• Evaluation of S corporation and S corporation blocker strategies
• Grouping activities among entities and partners to meet the material participation test
• The treatment of self-charged interest and self-charged rent under the NIIT rule
• Application of NIIT to net gain from dispositions of properties and LLC interests
• Prospects for future legislative or regulatory changes

Learning Objectives

After completing this course, you will be able to:

• Recognize when a taxpayer is subject to self-employment tax
• Determine when an LLC member or S corporation shareholder's flow-through income should be reported as self-employment income
• Ascertain the various tests related to limited partners and the treatment of an LLC member as a limited partner
• Identify the advantages of grouping activities among entities
• Understand the application of the NIIT to real estate activities and LLC members generally
• Discern how to avoid the material participation problem for limited partners

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, supervising other preparers/accountants, in tax planning and preparation of complex tax forms and schedules for U.S. businesses and individuals. Specific knowledge and understanding of the net investment income tax and self-employment tax; the basics of FICA and self-employment tax; the impact of the 3.8% Medicare tax on self-employment income of LLC members and limited partners; and familiarity with the 500-hour material participation test and S Corporation blocker arrangements.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).