Discussion:LLC member's salary

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YH (talk|edits) said:

9 January 2006
Hi I am new to this site. Does anyone know LLC members (single or multi member) can receive W-2 salaries from LLC? My client is setting up LLC (multi member) but he would like to have his tax withheld from distributions instead of making qualterly estimated tax.

MArdelean (talk|edits) said:

9 January 2006
Hello YH: Sure he can.

YH (talk|edits) said:

9 January 2006
Thank you --- so I guess he can receive scheduled salary during a year and a balance at the year end so that his Form W-2 amount is equal to his allocated distribution?

Riley2 (talk|edits) said:

9 January 2006
LLC members are classified as partners under tax law. Partners may not be classified as employees unless the LLC has made an 8832 election.

Lois (talk|edits) said:

10 January 2006
What Riley2 says is correct. They may not take wages. This is very clear in the tax code.

YH (talk|edits) said:

10 January 2006
Thank you Riley2 and Lois. Then the only way LLC member (without 8832 election)could pay tax is by making a quarterly estimated tax --- They cannot be on payroll with their employees ---- correct?

Lois (talk|edits) said:

10 January 2006
That is correct. If they want payroll they could elect to be treated as a Sub S corporation for tax purposes only.

Momentum (talk|edits) said:

31 October 2006
So if a member is also an employee, do you compensate them by a distribution rather than by payroll? Does this compensation get described in the Operating Agreement, separate from how the profits/losses are allocated to all of the members (some of the members are not employees).

Will (talk|edits) said:

31 October 2006
You compensate them with Guaranteed Payments which are described in the Operating Agreement. Distribution of any profits occurs after the Guaranteed Payments have been made and is also described in the OA.

Jdugancpa (talk|edits) said:

1 November 2006
Above assumes the LLC has NOT elected to be taxed like a corporation. If the LLC has elected to be taxed like a corporation, the members would be paid as shareholder-employees and would be paid W-2 wages.

CrowJD (talk|edits) said:

1 November 2006
You don't necessarily have to use guaranteed payments either (though health insurance premiums etc. are treated as GPs; [the Gp's are guaranteed payments because they are payable regardless of whether there are profits]. But, you can rely totally on the profit (and loss!) allocations in the OA, and that partner's distributive share of profits is net income from self-employment also, as I understand it (i.e. the net is taxable just as it would be under a Sched. C). The operative word is distributive share..... taxable whether distrubted or not. Another question, is there a consensus here on how practitioner's are treating self-employment taxes when you make no Gp's, and when the members are all professionals i.e. all working actively in the business, no manager managed etc?

JR1 (talk|edits) said:

November 1, 2006
Crow, you assume that everyone would want all the profits taxed as SE. In an LLC, which is what most of our 1065's are now, that's not the case for many of us, which goes to your second question. Using the guaranteed payments is a way to establish the reasonable salary, aka S corp, in order to then establish that the remaining profits are free from SE tax. I don't see how you could separate an SE portion from a non-SE portion out of K1 line 1 income otherwise.

CrowJD (talk|edits) said:

1 November 2006
Yep, JR1, that is the rub I've got. I'd love to be able to carve out a profits portion not subject to SE tax by using GP's. I just didn't know if most practitioners had decided to follow the Proposed (withdrawn)Regs. [1997] to be on the safe side. If you follow the Prop. Regs., then the LLC's I have would all be "service partnerships", and in that case, they can never be considered limited partners for purposes of avoiding any of the SE tax. At least as I understand it.

So, I take it most practitioner's are saying, hey, Member is a limited partner, he performs services, and I'll establish a reasonable compensation for them, make that the GP, pay the SE on that portion; and carve out my remaining profits free of SE (Sec. 1402 (a)(13)). Seems to me that is the consensus even if state law, for example, does not consider LLC's members to be limited partners (well, not these kinds of members). Frankly, I'd S 'em in a minute (or elect S. treatment), but then you run into not being able to have the flexibility to allocate.

Death&Taxes (talk|edits) said:

1 November 2006
There is another reason to take GPs in the state of PA. If they don't, the earnings that will be split are capitalized for Capital Stock tax. In PA the LLC must file a PA RCT-101, and if GPs are not made, they will find they owe the capital stock tax PLUS the self-employment tax. By the way, this same thing can happen with S Corps that save FICA/Medicare, but in those cases, at least there is that SS saving.

JR1 (talk|edits) said:

November 1, 2006
Without regard to state law, which may have a big affect...IRS did not and does not have authority to make these determinations yet. Congress specifically told them "Hands off, until we decide." That's been the end of it so far. I think we need to be reasonable ourselves, tho'. And following S corp guidelines seems appropriate. Unless state law says otherwise, whether service or sales, they're limited partners, and therefore, profit distributions are not automatically subject to SE. That's how I think about it, anyway, subject to change....

CrowJD (talk|edits) said:

1 November 2006
Well, that sounds reasonable to me, I'm sold! There's power in numbers. I'm hoping GA law is silent on the subject in it's LLC statute (don't make me look it up!!), anyone with practical experience with this under GA law, pls. let me know.

Another question bothering me. What is "earned income" in an 1065 LLC for purposes of funding a retirement plan? You wouldn't say it's the amount of the GP's paid, would you, because these are paid regardless of profit? What is earned income, the total of "taxable" profit, similar to Sched C, whether distributed or not?

Death&Taxes (talk|edits) said:

1 November 2006
Would it not have to be the amount subject to self-employment tax for each partner?

JR1 (talk|edits) said:

November 1, 2006
Agree. You can't have it both ways. Whatever is subject to SE would be the earned income for retirement. No doubt.

CrowJD (talk|edits) said:

1 November 2006
I think you have to conceptually go back a step further D&T, especially if you are basing the SE on Gp's, since GP's are to be paid independently of profits (that's why you can deduct GP's). It actually seems that "earned income" would be the amount of profits subject to being divided into distributive shares? Well, that may not be right either. Heh Heh. How about, the amount revenues exceed expenses? Can't go back much further than that. Heh. Now, if you are going to come forward and look at the K-1, then if you just look at line 1, it's a pretty low amount to be getting the max. out of your retirement (assuming you have GP's on line 4). HELP!

JR1 (talk|edits) said:

November 1, 2006
Again, you want it both ways. You can't limit what's subject to SE on the basis that that's the only part deemed to be 'salary' for the partner, and then suggest that all the profit should be used to compute the retirement contribution. That's just inconsistent...

Death&Taxes (talk|edits) said:

1 November 2006
The other kicker that I have seen often in LLCs is that if one member does not want to belong to the plan, there is no plan. I would think the simplest thing to do here is use 401Ks, which I have seen in partnerships. No computation problems and it is the easy way out.

CrowJD (talk|edits) said:

1 November 2006
I see the mistake I was making. The GP's are on the income statement (P&L), hence they are paid out of current year earnings.

Gingerg (talk|edits) said:

18 February 2007
Thanks all for help here. My question is what do to when LLC 1065 partners have already issued W-2's for 2006 and now ask me to do tax return? I believe they should be Sub-S because all four partners receive W-2 salaries. But can't elect Sub-S retroactively and all FICA has already been withheld and paid. Also previously in the stream CrowJD says Sub-S not good because you loose the "flexibility to allocate" - can you say more about what that means, before I tell these people to go form a Sub-S !!

Thanks for any help you can give me.

JR1 (talk|edits) said:

February 18, 2007
Don't confuse the two issues. First is entity. That question is only, "What are they?" Clearly, they did not elect corp status of any kind, so they are a 1065 filer. Period. Nothing after that changes that, ok? Now, they issued W2's in error. What to do? I'd say since you're still in February, prior to W2 due dates, amend them and correct payroll filings. If you can determine that there would be no impact in just keeping the W2's, then treat them as salaries on the 1065 and move on, banning any future W2's. Finally, you're in the window to make a new decision on whether they should be an S corp. But I don't recommend checking the stupid box. If you think the corp is in order, create the corp, do it right, and assure yourself that all is as it should be, ownership reflects what it should, etc.

Mfamily (talk|edits) said:

23 March 2007
Ginger, I have this exact same issue, electing S Corp is out of the question. I can't think of anything beside following JR1 suggestion of ignoring it for this year. Did you come up with anything else?
  • A series of questions from non-tax-pros have been moved over to the consumer forum (here). The following response was written to one of them, but provides good info for tax pros, too, so it has been both copied to the other discussion and left here:

KatieJ (talk|edits) said:

29 May 2007
If the LLC is taxed as a partnership, all of its members (owners) are partners for income tax purposes and CANNOT be W-2 employees. So no, there is no way to give an LLC's employees equity without making them subject to the partnership rules (unless the LLC elects to be taxed as a corporation). As noted above, it appears that under current authority (or, more accurately, the lack thereof) those members who perform services for the LLC can be given guaranteed payments in lieu of wages, which would be subject to SE tax. Their distributive shares of net income (calculated after deducting guaranteed payments) arguably would not be subject to SE tax, as long as the guaranteed payment represents reasonable compensation for the services they provide. This is the way it is done for S corporations, except that in an S corporation, the stockholder/employee receives a W-2 rather than a guaranteed payment. The principle ought to be the same, as JR1 suggests. At least, we think so <G>.

There are some other considerations you (and your employees) might want to look into. For example, converting employees to LLC members may jeopardize or limit their rights to claim workers compensation or unemployment benefits. If you are in a state that provides state disability insurance (CA, NJ, a handful of others), partners may not be eligible for benefits under that program. In general, employees have certain rights under state law that may or may not be available to LLC members who are treated as partners for tax purposes.


Jmjcpa (talk|edits) said:

16 October 2007
i have an llc with two partners (husband and wife) and they have been reporting their earnings as regular employees (W2 wages) all year long. can i file form 8832 and check the box to be taxed as a sub s corporation and file an 1120s for 2007?

Jdugancpa (talk|edits) said:

16 October 2007
http://www.irs.gov/pub/irs-pdf/f8832.pdf

See page 4, "When to File". (Last resort, read instructions.)

Taxref (talk|edits) said:

16 October 2007
Form 8832 would not be used, as the S election must be made on Form 2553. It is also too late to be classifed to be classifed as an S corporation for 2007, unless one of the late-election exceptions are met.

You also have a problem if a non-electing MMLLC has been paying the partners as though they are W2 employees. Amended payroll tax returns would be in order.


JeffreyFoster (talk|edits) said:

27 February 2008
I will try to keep this simple but maybe in doing so I will be leaving out important information so let me know. A member of an LLC receives Guaranteed Payments and the LLC has a net loss for the year that is greater than the GP for the member's share. Our taxware is showing that the member owes SE tax on the GP yet Sec 1402 says that you can aggregate earnings from multiple trades or businesses for SE tax purposes. Is the software wrong or am I missing something?

Kevinh5 (talk|edits) said:

27 February 2008
the K-1 should show net earnings for SE purposes, didn't it net it out?

JeffreyFoster (talk|edits) said:

27 February 2008
I did not actually see the K-1. The working partner for the office was doing the return and asked the question. I will have to ask him that question and get back to you.

Kevinh5 (talk|edits) said:

27 February 2008
well, if you value your job do NOT tell him 'tax software is no substitute for a good tax professional'

Nshnider (talk|edits) said:

26 August 2008
so if the llc chooses to be taxed as an S corp and the LLC has 4 members, is the LLC the stockholder or are the individual members the stockholder and who gets the K-1s

Kevinh5 (talk|edits) said:

26 August 2008
no one is a 'stockholder' in that example, Neil, they are 'members' who get K-1s.

RoyDaleOne (talk|edits) said:

26 August 2008
Is the member in effect a limited partner?


GinnyT (talk|edits) said:

8 October 2008
I need some assistance. I have a Partnership which made SEP contributions for employees and a partner (based on his SE earnings from the Partnership). The K-1 from the partnership accurately reflects the SEP contribution and the guaranteed payments as SE earnings. The problem is that I have another K-1 for a totally independent partnership which has an SE loss so on my 1040 my "net eranings from SE" is a negative number. When utilizing Turbo Tax it is disallowing my SEP contribution deduction for lack of earnings to calculate the maximum contribution. I can not find any definitive writing on this other than in Pub 560 in which it states that net earnings of the partnership with the retirement plan is the only earnings that can be considered when calculating the maximum allowable SEP contribution. SO.. does that also work for my situation in which I have plenty of net earnings from my partnership with the retirement plan but an overall "loss" of net earnings with multiple partnerships. Can't I calculate my maximum contribution on the one partnership only??

RoyDaleOne (talk|edits) said:

8 October 2008
Does not TurboTax have its own forum or place on the web for such questions?

GinnyT (talk|edits) said:

8 October 2008
I am not sure. I guess I am less concerned about making Turbo Tax work and more concerned with the correct tax treatment.

CrowJD (talk|edits) said:

9 October 2008
Can a partnership make SEP contributions? Perhaps you've already researched the point. I thought there was some wrinkle in this regarding the partners themselves.

Taocpa (talk|edits) said:

9 October 2008
GinnyT,

Look here:

The Purpose and Use of Tax Almanac

You will find the link for TurboTax under #2.

Tom

Riley2 (talk|edits) said:

9 October 2008
Do the same 5 or fewer partners own at least 80% of each partnership? If the answer is yes, and the effective control requirements are satisfied, then the 414 aggregation rules apply for Sec. 415 purposes.

This probably sounds like mumbo-jumbo, but if you can answer the above threshold question “no”, then you need not worry about the aggregation rules.

GinnyT (talk|edits) said:

9 October 2008
Thanks for your responses. No, aggregation doesn't apply, the common ownership is only 50%.

The SEP contribution was made by the partnership and the partner can receive an equal % based on his SE income from the partnership. I was wanting to find support for only considering the SE income from the Partnership that contributed to the retirement plan in lieu of limiting the contribution (which has already been made)because of a loss from his other partnership.

I have now posted the same question on the TT discussion board.

GinnyT (talk|edits) said:

9 October 2008
Am I using the site incorrectly? I have never posted on a forum prior to this. I am a CPA but my primary job is in industry. I was in public acctg for a few years 15 years ago. This experience along with the "CPA" suggests all my friends and relatives should enlist my assistance with their taxes. THe situation I am asking for help with is a friends return, Just let me know if I am stepping over the line on the forum.

Taocpa (talk|edits) said:

9 October 2008
GinnyT,

Well, that depends. If you are paid to do tax returns, you are a tax professional and are bound by Circular 230. So this site is for you technically speaking.

This is why it helps to fill out a profile, so we know something about you.

Now, I only directed you to that piece because you said you were using Turbo Tax and not one of the major pieces of tax preparation software, such as Lacerte, ProSeries, Drake, etc. The problem is we get lots of DIY'ers here and your question was framed in the first person indicating a DIY question. That is why RoyDaleOne answered the way he did.

FYI, Riley2 is one of the board great contributors. When he speaks, you listen.

You can override Turbo Tax I am sure, if it is not giving you the correct answer. You might have to figure out what that is on paper.

Now that you shed some more light on this, someone can steer you in the right direction a little better.

Tom

GinnyT (talk|edits) said:

9 October 2008
Understood. I do get paid for doing this friend's returns but other than it and my brother in law's Dental practice ( a C Corp), I do not do returns outside my immediate family. Consequently, I do not have much research material available to try and solve a complex issue. I already know how to override TT to make it work but the fact that TT did not allow the deduction originally is what prompted me to find the correct treatment. I am limited to IRS Pubs and web searches so I was looking for someone else who has encountered this situation.

I found Pub 560 to favor the separate treatment of Partnership SE income but it was definitely an interpretation so I was looking for confirmation from others that they agreed (or why they did not agree).

I will go back and fill out a profile, thanks.

GinnyT (talk|edits) said:

10 October 2008
Tom,

I am embarrased to say that I can't figure out where to fill out a profile. I managed to find User Profile but it only asks my name, nickname and email address. If someone would guide me to the right screen I will be happy to update the information.

I also contacted a pension professional regarding my question and I am posting what he responded below. Any thoughts?

This issue is debated among pension practioners as the IRS has not issued any specific guidance. The conservative majority opinion is that the net earnings from self-employment for purposes of paying self-employment social security taxes on Schedule SE is based on combining the profit and loss from multiple businesses. Based on this calculation, the maximum contribution amount should be based on the net earnings amount. However, in this case it's possible that the argument could be made that the businesses are not part of a group under common control because the taxpayer does not control the second business since he/she does not own more than 50% and hence the contribution should only be based on the compensation from the business sponsoring the plan where the taxpayer has control (consistent with the language on page 5 of Pub. 560). Also, the entry amount on line 28 on the 1040 will not kick out a notice because the type of plan is not identified on the return and if the plan was a 401(k) or defined benefit pension plan then the amount on this line would probably be higher.

Ginny

LH2004 (talk|edits) said:

October 10, 2008
Your "pension professional" is wrong.

Death&Taxes (talk|edits) said:

10 October 2008
"Also, the entry amount on line 28 on the 1040 will not kick out a notice because the type of plan is not identified on the return and if the plan was a 401(k) or defined benefit pension plan then the amount on this line would probably be higher."

And a tax professional cannot use that reasoning which is akin to the slim possibility of audit rationale.

GinnyT (talk|edits) said:

10 October 2008
I was not putting any stock in the final sentence although I was hanging some hope on page 5 of Pub 560. It keeps referring to "the business" not "net of all businesses", etc. LH2004, you say he is wrong but you don't say what is right. I am trying to find out what is right and possibly have a little "back and forth" to make sense of it. It doesn't seem correct that you would only consider the single businesses income (the one with the retirement plan) when it would increase your maximum allowed deduction but you must consider other business losses if it would reduce your allowed deduction. Someone tell me the problem with my logic...

LH2004 (talk|edits) said:

October 10, 2008
See sec. 404(a)(8)(D) and tell me why we need to wait for the IRS to pronounce on anything.

CTurner555 (talk|edits) said:

11 October 2008
Ginny; is the K-1 box 14 negative for self employment? Does this partner perform services for this partnership? Is it possible that the K-1 box 14 was prepared in error? I can't think of a reason for negative self employment earnings; but perhaps someone else can enlighten me as to when this would happen.

Kevinh5 (talk|edits) said:

11 October 2008
certainly you would net the SE activities so a negative (from an active business loss) would be useful to notice

GinnyT (talk|edits) said:

11 October 2008
LH2004, I suspected you had the key, thank you for sharing!! That was exactly what I needed.

The SE earnings are negative due to a loss from a separate GP partnership that exceeds the income on this partnership.

I will read sec 404 before I fall asleep tonight.....

Taxestaxes (talk|edits) said:

29 January 2009
The above posts have provided alot of insight for me and answered most of my questions and concerns, but I just want to clarify and sorry if this is a stupid questions. I understand that in a partnership LLC, W2's arent issued to the partners, and thats fine, the partnes did not take wages; however, one of the partners, received a payment each week. So does he get a 1099? I dont even know if its a guaranteed payment or not, the client hasnt brought me his documentation for his LLC, which was just set up this past year. Its 2 brothers, with the younger, only 10% partner, getting these payments. You could say big brother is just trying to take care of the young one.

KatieJ (talk|edits) said:

31 January 2009
The weekly payment to a member should be treated as a guaranteed payment if it is compensation for services the member provides or interest on capital provided by the member to the LLC. The LLC's operating agreement should provide for that; if it doesn't, it probably needs to be amended. If it's not for services or for the use of capital (which I gather it may not be), it's just a distribution and will reduce that member's basis in the LLC, while not affecting his distributive share of income. Distributions in excess of basis result in capital gain income to the member. See IRC Sec. 731 and Reg. Sec. 1.731-1(a)(3).

RoyDaleOne (talk|edits) said:

31 January 2009
Section 1.707-1(a) of the Income Tax Regulations provides that a partner who engages in a transaction with a partnership other than in the capacity of a partner shall be treated as if the partner were not a member of the partnership with respect to such transaction. The regulation's section further states that such transactions include the rendering of services by the partner to the partnership and that the substance of the transaction will govern rather than its form.
 Section 707(c) of the Code provides that to the extent determined without regard to the income of the partnership, payments to a partner for services, termed 'guaranteed payments', shall be considered as made to one who is not a member of the partnership, but only for purposes of section 61(a) and, subject to section 263, for purposes of section 162(a).

If the payments were not termed guaranteed payments, nor were they made in the capacity of a partner, then, maybe they were wages for services and should be treated as such for withholding and social security taxes. <-------- This may or may not be correct.

Yt1300inHtown (talk|edits) said:

7 December 2011
Bump

New client is a 2 mmember LLC (husband and wife) filing a 1065 and at year's end the previous tax preparer "reclassed" an amount from partner distributions to guaranteed payments.

I have not seen anything in the organizing documents that addresses this and the client CLAIMS to never have disucssed it and doesn't know what it is there for.

Is this something any of you would do without consulting the client first? I can't imagine I would.

YT

Ckenefick (talk|edits) said:

7 December 2011
YT's in the Hawse...it probably makes no K1 difference, but maybe it does...did it affect the S/E income amounts on the K1's? I'm wondering if prior preparer reclass to GP's and then only subjected the GP's to S/E tax.

Yt1300inHtown (talk|edits) said:

7 December 2011
You are right on point Ck. It did exactly that. Only the GP portion was subjected to SE tax. And I guess that is expected...I just don't agree with making these kinds of adjustments "for" clients...assuming they really didn't know he was doing it.

Ckenefick (talk|edits) said:

7 December 2011
assuming they really didn't know he was doing it.

Maybe this is a big assumption. Maybe client has a bad memory.

Janakpatel (talk|edits) said:

10 December 2011
LLC members are paying SE tax on the net income from the partnership, distributions has nothing to do with the SE tax.

Ckenefick (talk|edits) said:

11 December 2011
LLC members are paying SE tax on the net income from the partnership,

Says who and definitely not in this case. Read what YT wrote - Ordinary income on the K1 was not subjected to S/E tax, only the guaranteed payments were.

Birdman (talk|edits) said:

13 December 2011
I'm curious, what is the big deal? Why did the IRS/congress care if an LLC member gets a W2 rather than a distribution or GP? I can't see any difference in taxation, so why all the effort?

Janakpatel (talk|edits) said:

13 December 2011
Ckenefick

Read what YT wrote - Ordinary income on the K1 was not subjected to S/E tax, only the guaranteed payments were.

Why two active LLC members are not paying SE tax on the net income?

Ckenefick (talk|edits) said:

13 December 2011
What do you mean "read what YT wrote" - I'm the one that pointed out to him what was going on.

Why two active LLC members are not paying SE tax on the net income?

And again, I say, "Why not?" Can you tell me where specfically in the Code, or anywhere else, we have S/E tax rules for LLC members? I can tell you this: 2 sets of proposed regs were withdrawn, that's it. Granted, we got Renkenmeyer, but this was a court case involving an LLP.

GFCPA2010 (talk|edits) said:

27 November 2012
I have been looking for this all over the internet, and I think that you guys did a great job here. My question is, what if wages to partners were paid as W2s, and the client wants to change that, but the client wants to know what would be the implications?

Thanks,

'g

JR1 (talk|edits) said:

November 27, 2012
Implications are they'd now be doing things correctly, and you'll be replying to mail telling them you no longer have employees (if they don't). If you do, it's easier since you'll still be filing forms but without the partners' income. Note they need to make estimated payments...

GFCPA2010 (talk|edits) said:

27 November 2012
Tks JR1, it's too bad, that there are no implications for something so blatantly wrong, lol (the wages are ratably allocated for the year as opposed to estimates)

Fpayne (talk|edits) said:

29 November 2012
Recently I took an LLC taxed as a partnership thru a standard IRS LB&I division audit. FYI there were no changes - zero adjustment. All owners actively participate in operations in excess of 2000 hours each annually.

All are salaried, receive W-2 statements, participate in same benefit programs as employees.

During course of exam I pointed out to the IRS: 1) Only managing member subject to Section 1402, a) other members' management roles are subject to MM's delegation, b) salaries in excess of market thus personal efforts of non-managing members are adequately social taxed (more than adequate, SSA over-funded).

2) Wages are paid because tracking guaranteed payments is administratively unfeasible. Sorry Vern Hoven, just the way it is.

And for multi-state taxpayers, consider you CANNOT be compliant with various state income, unemployment and workman's compensation rules without administering wages to all workers. Attempting to process guaranteed payments thru a myriad of conflicting worker status regulations is near impossible to say nothing of a waste of time. Allocating wages to work locations so taxpayers are compliant with state apportionment is much easier with wages than guaranteed payments.

So for those of you focused on federal rules, I recommend that other tax regimes are at times more relevant, and in this case any IRS disagreement with wages to partners simply takes a back seat to practicality, global compliance and accurate administration.

There is NO detriment to the IRS for partners to receive wages - no economic damages, hence no cause of action.

FYI I believe this "wages to partners" is so last Tuesday. Phraseology for benefit of newer generation of tax advisors. IRS concerns probably stem from the 1960-'80s, when allowing any indicator of employee status for a general partner was seen as a threat to attribution of personal liability. I.e. the IRS dare not grant employee status to a general partner or it could be caught in a web of state liability law disputes. With the advent of the LLC and decades of case law, the issue, to me, is moot.

Pay wages to partners in wild abandon. Just don't hide income or fail to apportion fairly. The rest is negotiable to some degree.

GFCPA2010 (talk|edits) said:

29 November 2012
I think that the tax code is set up in a certain way for a reason. I looked into this matter, and did some work, here is what I came up:


 Guaranteed payments for consulting services or capital, do not have any withholdings on any level of taxes as per the IRC;  partners are responsible for their own payments quarterly. That’s the bad news, the good news is that you end up saving on taxes  for the FICA tax and individual income taxes. 

To demonstrate:


Last year, Partner A had $76,500 in guaranteed payments from Partnership ABC along with ordinary business income of $1,255 (from K1). That is total self-employment income of $77,755. As you can see from Form SE (line 2), which is multiplied by 92.35% to arrive to taxable income of $71,807 (reduced). Now the amount of taxable guaranteed payments is therefore $70,647.75 ($76,500*.9235), right? So if we were to pay that as W2 earnings, we both know that there is no reduction on gross wages, hence the amount taxable for SE taxes would be the full $76,500, and the amount of payroll taxes due would be (not including SUTA, FUTA, and workmen’s compensation expenses)$10,174.50 ($76,500*.133). Now as for claiming that amount on form SE would amount to $9,396.15, so that equals tax savings of $778.35.


I think that the most crucial part is that if you put through any amounts paid as wages and not as guaranteed payments, the partners can’t use any of the 57.51% (2011)of self-employment tax as an adjustment to their respective gross income on their personal taxes, hence, they end up paying more in federal, state and local taxes as well. The deduction from gross income from the example above would amount to $5,403.73 ($9,396.15 (self-employment tax) * 57.51%).


Best,


G

Ckenefick (talk|edits) said:

29 November 2012
FYI I believe this "wages to partners" is so last Tuesday.

I agree with that for the most part...just as long as you're not treating the partner as an *employee.*

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