Partnership

[RNuse09]

I have a client who newly started a Partnership, LLC. There are three total partners two of the partners are on the payroll. The general partner is not on the payroll. He just gets a larger portion of the income at the end of the year. I was thinking that his portion of the income I would move onto a sched c where he would pay the self employment tax at the end of the year. Can I do this? Can you seasoned preparers please give me some advice?

Thanks,

[Gary2]

The partners shouldn't be on the payroll unless the LLC has chosen Corporate or S-Corp status. Either way, there is no schedule C for this. The partners will all get a K-1, so the only question is whether it's from a 1065, 1120, or 1120S.

[S T]

Agree

Presuming it is a Form 1065 (LLC reporting as Partnership) Partners would not be eligible for payroll, either a distribution or guaranteed payments depending on the partnership agreement and amounts would flow through on the K-1 form - K-1 form would then be reported on Sched E page 2 - No schedule C - and any appropriate SE income reported on the SE

If electing S Corp or Corp then maybe a payroll.

Sandy

[Lion]

If a corp

And, if a corp be careful of unequal distributions. With corporations, C or S, distributions need to be in proportion to stock ownership. Payroll can vary, of course.

[RNuse09]

Sorry

Sorry for all of the questions. The client wanted his sons to be partners in the partnership, with him getting the biggest share. They all work together in this business. He wanted the children to receive a steady pay check. I thought them being on the payroll would be a good idea. And at the end of the year all of the partners would receive a proportion of the income through k-1's. Then I got to thinking wouldn't the father being getting around pay self employment tax. Can someone please explain. I usually only handle 1040's, and I am trying to learn new things in slow season. I was thinking form 1065 taxed as a partnership.

Thanks,

[S T]

Guaranteed payments

If partnership and want a regular pay to some partners, then guaranteed payments to those parties - they then would not be on payroll - but should file Estimated Tax Payments for the income and SE tax.

Father would still have to pay income tax and SE tax on his proportiante share of income through K-1 at the end of the year.

Keep in mind that the guaranteed payments reduce the ordinary income as it is a deduction on the form 1065 under ordinary income box 1 on the K-1 form.

Are you preparing the Form 1065 as well???

Tax Book has some good examples on the Partnership Returns.

Sandy

[RNuse09]

Ideas

If I already have the kids on the payroll. Is there anyway I can fix this, they have been on the payroll for about a month now.

Thanks,

[S T]

Payroll

Your post would indicate for tax year 2011

Are you filing or have you filed 941 and associated State Payroll Returns??

If you haven't filed - don't - as the quraters are just now due July 1 , 2011 - Sept 30, 2011

If you have filed - Amend to -0- as soon as you can or once it can be sorted out

Have you made any EFTPS Federal or State payroll tax payments??

Are you preparing the accounting on the partnership? If so - set up a "guarantee payment" under expenses and the other partner would just have distributions.

Sandy

[Gary2]

Here's a curious thought: It's not strictly necessary to have the children receive guaranteed payments. They could, in theory, just have a fixed monthly or weekly draw against their share of the profits. Whether that's better, worse, or indifferent depends on the numbers. I'd have to think about it to see whether it makes a difference, but perhaps someone else could comment. But it does suggest that even if you stick with the guaranteed payment approach, you should think about the implications of doing it that way.

Being a bit of a pedant, I do suggest avoiding the label "general partner," since that applies to a limited partnership, not an LLC.

[S T]

Partner Draws

If the two "persons" need to have a set weekly/monthly amount they could be listed in the Partnership Accounting as either "Draws" or "Guaranteed Payments"

The difference for the Partnership return income/loss would be that "Draws" do not reduce the Net Income - Guaranteed Payments would reduce the net Partnership Income for all partners.

At either point - all partners will have some share of income/loss - partners receiveing guaranteed income would report that income from the K-1 and reduced income or higher loss from K-1.

Sandy

[RNuse09]

Can I

Can I literally have them right down the guaranteed pmts and put that on the return, what do you guys and girls do. I am a little confused at to know how much of the guarnateed pmt would be subject to SE. Thanks ina advance fort the help.

[S T]

Partnership K-1

The guaranteed payments are passed through from the partnership form 1065 via K-1, and are usually subject to SE

Are you preparing the form 1065 and Associated K-1 forms?

Here are the links for Form 1065 and K-1 forms

http://www.irs.gov/pub/irs-pdf/i1065.pdf

http://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Sandy

[Gary2]

The guaranteed payments really should be specified in the operating agreement. At least I'd be more comfortable with that.

A guaranteed payment is a payment to a partner, or in this case, to a member, that is required to be paid regardless of the profit or loss of the entity. It's most commonly used to ensure that the partners/members who are actually doing the work get a decent "salary" (though it's not a salary in the payroll sense), which is why it's most commonly subject to SE tax. It's entirely possible, but uncommon, for a partner/member who isn't doing any work to get a guaranteed payment, say to compensate for a large capital investment.

In your case, it sounds like they're all doing the work, so I'd start with the premise that it's all subject to SE tax. The 1065 will result in a K-1 for each member The K-1 will go onto the schedule E, and then onto the schedule SE. In addition to the IRS forms and instructions, see Pub. 541, for partnerships.

[natiro]

Partnership

RNuse09: your posts make me nervous. As someone who prepares many Forms 1065 and who took 32 hours of CPE specifically addressing those returns this year, I firmly believe you should not be preparing the partnership return at all. You don't have the expertise to do so and in my opinion, it is malpractice to prepare a return in an area in which you have no expertise. I think you should suggest to your client that they find a practitioner who has experience with these returns. Then, if you want to practice in this area, first take CPE, study materials about partnerships, etc. I subscribe to PPC's 1065 Deskbook which is an excellent resource and I use it often. I'm not trying to be hard on you but I really believe you're in over your head.

[JG EA]

Another point to consider. Guaranteed payments don't help basis at all.