LLC's

[Jesse]

I have several clients that have LLC's set up by a local CPA with the LLC taxed as a partnership but yet they are issuing W-2's for the payments to the partners. Shouldn't these be reported as guaranteed payments on the K-1 without the issuance of the W-2?

Another question, what is the advantage of forming an LLC and electing to be taxed as a Corporation?

[JoshinNC]

I sometimes do the same thing

While Revenue Ruling 69-184 says that a partner who performs services for the partnership should receive their pay as GP it does not prescribe a penalty for not doing so. I always tell my LLC members what the ruling says and then explain to them that if they take the pay as GP they will be responsible for paying the SE tax when filing their return. Most opt to have withholdings taken out and a W-2 filed, as it does not affect the bottom line. My opinion is that as long as the IRS is getting the tax, whether it be through withholding or when the 1040 is filed, they are not going to make a big deal about it. If the tax never got paid they would be more apt to begin investigating.

Taxation as a corporation can carry benefits, but each situation is different. Hard to answer that question without specifics.

I'm sure someone out there is going to jump on me for allowing my clients to make the decision related to RR 69-184, but you have to remember that it's their money and we just here to advise them as to the way the IRS wants it done.

[OldJack]

I agree

I agree with JoshinNC. Some taxpayers need to have W2 withholding or they will never have their taxes paid-in and resulting with the IRS always after them.

[Jesse]

Frustrating

I get frustrated because I tell my clients that this is not how it is suppose to be reported, but I'm not a CPA so in the mind of my clients, of course I can't be as wise as the person who set up and is preparing Form 1065 for the LLC.

If it was explained to my client correctly it might be different because MAYBE(and that's a big maybe) then they would know were I am coming from and that it is not just that I "don't know what I'm talking about".

Personally I do disagree with the W-2 reporting and I will not give my clients the choice, either Guaranteed Payments or find someone else. If the business can pay the w/holding through the 941 process why can't you set it up to have this money distributed to the individual members to remit on 1040-EStimated Voucher?

[OldJack]

Personally I do disagree with the W-2 reporting and I will not give my clients the choice, either Guaranteed Payments or find someone else.

Jesse that is the wrong attitude as you and I are just the tax preparer. We advise in writing but if the client doesn't take our advise that is their business and we have done our job. BTW, why not take the CPA exam?

[Jesse]

I don't think that this is a wrong attitude and even as just the tax preparer I'm not willing to do something incorrect because the taxpayer can't take the responsibility to make estimated tax payments or come up with the SE tax due 4/15.

I advise them of the correct way, or what I believe the correct way is and if someone else is willing to do it differently I have no problem with the loss of the client. Sometimes what I think is correct/incorrect is just the oppisite - that's why I like this board and all of you great people willing to help.

The flip side of the coin is if there are any penalties for the W-2's down the road, clients seem to have selective memory - although you gave them a choice and they took the one that really was not correct are they going to take responsibility? Do you want to take that chance?

I like my little corner here in the Tax Prep business and have no want to take the CPA exam, even if I did chances are slim that I would ever pass as it involves so much more than just Income Tax. I'm an EA and even have a few CPA's as clients as their specialties are Corporate taxes and there are income tax laws that they are not familiar with.

I call my clients that have not returned and ask them if there was a problem or why they did not return. Most I have found decided they wanted to do their own online or have a friend help them do their own. Also we have a Financial Advisor in town that has advised some mutual clients to seek a CPA for thier income tax preparation as I am "just a tax preparer" and some have taken his advice. What I find ironic is that he is not a CFP so why should his clients trust that he has any knowledge in the Financial World!?!

[geekgirldany]

I always tell them to do Guarantee Payments too. They don't understand why they can't do W-2s. I try my best to tell them why. I ususally say for them to calculate what their taxes would be if they were doing payroll. Then take the money and deposit it into a savings account to pay estimated taxes every quarter. If I do their bookkeeping it ususally turns out good. But I had one client leave me because I said they had to GP not W-2. More involved but it came down to one of the wifes saying I wasn't a CPA. I had a auditor call me "just the number cruncher" a few months ago.

So I understand about people saying "just a tax preparer". It happens but they can go somewhere else.

[Unregistered]

geekgirl

I don't want to be confrontational, but you can't tell a client they have to do anything. All you can do is advise them that the IRS has a way in which they prefer to see the payments come in. If they tell you that they want to do it otherwise, get it in writing and do as they wish. Otherwise, you will lose clients over something as petty as this.

Just my opinion!

[geekgirldany]

Something like GP vs W-2. Not a huge deal. But you have to draw a line somewhere. If you budge on one thing... they may think you will budge on others that are not so petty.

Just my opinion also

[S T]

Agree with Jesse and Geekgirldany

I advise my business clients as well as my individual clients, what the regulations are. If I am in the capacity of preparing and monitoring their monthly accounting, or advising on business and tax matters, then I do expect them to make an attempt to heed the advice and information that I pass on. If they choose not to, then I basically choose not to be involved in their tax matters. I don't have time for follow up notices and IRS audits, nor do I want to place myself in jeopardy for preparer penalties, etc.

What most taxpayers don't understand is that you don't have to be a CPA to be able to provide the correct advice. There are a lot of preparers that are not CPA's or EA's and very capable of implementing the tax laws. There are CPA's and EA's and other tax preparers that will not follow the tax laws.

LLC, should not be W-2, should be GP and estimated tax payments. S Corp should be W-2 at reasonable comp.

So Jesse and Geekgirldany, if you are not CPA's then possibly obtain your EA, that will give you some credentials, and at that point, you do specialize in taxation.

Sandy

[geekgirldany]

I am looking into getting my EA this year. I think jessie said she had hers. I know this adds more cred when you explain to them what it is.

[Matt Sova]

No problem

The firm I worked at years ago had one of their partnerships audited (unrelated to Wage/GP). The 3 partners took a wage, that is what they wanted to do. The auditor had NO problem with this. As a matter of fact, he thought it was pretty stupid of them since now they were paying Federal and State Unemployment taxes as well.

You all know how some people are. They will have no problem paying $800/month in 941 deposits, but you tell them to come up with $2400 a quarter and they just can't do it. We all have clients like that, don't tell me you don't. Sometimes the wage is the way to go for some of these people.

Another wrench in the works for you. LLC taxed as partnership. Uses an employee leasing firm to run all their employees through, INCLUDING the owners of the company. Do you expense all wages expensed as employee lease expense? Do you take GP over and above the wage that the owners received from the leasing company? Do you tell them that they are wrong and fire them? If you do, please, give them my card. I'll take the client.

Matt

[Jesse]

Another wrench in the works for you. LLC taxed as partnership. Uses an employee leasing firm to run all their employees through, INCLUDING the owners of the company. Do you expense all wages expensed as employee lease expense? Do you take GP over and above the wage that the owners received from the leasing company? Do you tell them that they are wrong and fire them?

Matt

FUTA and SUTA as well as Work Comp crossed my mind, as employees you are not exempt from paying these costs, however if something happened would you be able to collect unemployment or Work Comp, it seems you would be paying these extra costs for nothing. In my cases I am working with the LLC members/managers that come to me with the W-2 and I do their personal taxes, not the LLC's.

I do have a question for you Matt, when you do an LLC and pay the owners on a W-2 or through a leasing company how do you handle the profit that is split by % to members/managers that materially participate - subject to SE tax or not? What if they have a loss, it can't reduce the wages subject to FICA/Medicare?

[Bees Knees]

REV. RUL. 69-184

"Bona fide members of a partnership are not employees of the partnership
within the meaning of the Federal Insurance Contributions Act, the Federal
Unemployment Tax Act, and the Collection of Income Tax at Source on Wages
(chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code
of 1954). Such a partner who devotes his time and energies in the conduct
of the trade or business of the partnership, or in providing services to
the partnership as an independent contractor, is, in either event, a
self-employed individual rather than an individual who, under the usual
common law rules applicable in determining the employer-employee
relationship, has the status of an employee. Sections 1402(a) and
3121(d)(2) of the Code."

"Remuneration received by a partner from the partnership is not "wages"
with respect to "employment" and therefore is not subject to the taxes
imposed by the Federal Insurance Contributions Act and the Federal
Unemployment Tax Act. Such remuneration also is not subject to Federal
income tax withholding."


The penalty for not following the above is the IRS can assess SE tax that the partner did not pay. FICA withholding is no substitute for SE tax. The IRS can assess SE tax regardless of whether or not the partner had FICA withheld on a W-2.

[S T]

thank you

Thank you Bees, now some of us will have the Rev Ruling when advising our clients, and to support our recommendations on treatment of their income.

Sandy