Do i need to change LLC partners from Employees to Contractors?

[smart565]

I just took over our LLC's books and realized that we have been paying our partners through regular payroll and issuing them W-2's instead of issuing them 1099-NEC forms.  I'm working on 2020 taxes and am not sure what to do at this point.  Two of the three partners receive tips, the third is just a straight contractor. I'm thinking that going forward, I list the two that receive tips as both employees and contractors - listing their tips under employee and their straight pay under contractor. Not sure if this is right, yet my main dilemma is what to do for 2020 taxes. 

W-2's have been issued and so, are on record.  In doing my business taxes, I want to reduce the (incorrectly reported) W-2 wages and instead, list Guaranteed Payments (only the straight pay, not the tips) to the three partners on my Form 1065.  Just not sure what can of worms this will open.  

Do I:

a) continue to try and straighten out my 2020 situation,

b) let 2020 go as is and move forward with 2021 making my adjustments for payroll already paid in 2021 OR

c) do I simply leave the partners as W-2 employees and just not worry about it?

Not sure of the tax/audit implications here - for our business or our partners - I need help!

I guess my main concern is the IRS - I assume they aren't going to like losing the taxes paid monthly, but these partners should be legit 1099-NEC receivers, as well as W-2 receivers for their tips.

ANY help is greatly appreciated!
~Shawna

[alexandriak]

Let me start by saying I'm not an accountant, so take what I say with a grain of salt BUT

I have an LLC and I'm a W-2 employee under my LLC. I don't see why they need to be contractors and if it were me I would just continue to pay as a regular employee. 

I would highly recommend you connect with an accountant in your area that could better guide you.

[smart565]

Thank you for your response!  My question for you is, is your LLC a Partnership or Sole-Proprietor?  All of my research and education tells me that partners in a LLC are considered self-employed and need to be issued a 1099-NEC (was 1099-MISC) as opposed to W-2's.  I'm all for leaving it as it is, if that is the correct way to do it.  Just not sure which is the best for our business as well as our partners?  Leaving them as employees seems the safest way, as taxes are being collected from them regularly - just not sure.

[alexandriak]

You're welcome. It may vary from state to state (again not an accountant so I don't know) but in my state of PA and federally I'm looked at as a single member LLC S-Corp. 

I switched to this structure so I could pay myself thru my payroll as a W-2 employee and made this change with the help of my accountant. This will be the third year with this setup for me.