S/E tax on distributive share of income for partners of LLC'S and non-LLC.

[gwt]

My page 20-3 and 20-4 of my Taxbook are missing. It is my understanding that the distributive share of income to non-LLC partners is subject to s/e tax while the distributive share of income to partners in a LLC partnership is not subject to s/e tax. Can anyone confirm this information for me?

[Black Bart]

I don't believe

that the LLC status has anything to do with it one way or the other, but it seems like there was a big argument on this board a while back about whether or not partnership profits were subject to SE (or maybe it was guaranteed salaries--I'm not sure). Anyhow Armando will know and probably show here PDQ on this.

[rosieea]

The issue is whether managing members of an LLC are treated as general partners of a partnership for SE tax purposes. Some say yes & some say no, and the IRS apparently is loath to issue a ruling. I, fortunately, have been able to duck the problem, since the multi-member LLCs I deal with have elected tax treatment as S-Corporations. That, by the way, is a growing trend here in Florida. Attorneys in these parts seem to feel that the LLC in Florida provides better liability protection than incorporation.

[Bees Knees]

My page 20-3 and 20-4 of my Taxbook are missing. It is my understanding that the distributive share of income to non-LLC partners is subject to s/e tax while the distributive share of income to partners in a LLC partnership is not subject to s/e tax. Can anyone confirm this information for me?

Call customer service. They will get you new pages.

The SE tax issue for LLC members is discussed on page 5-25 of TTB. The information on page 20-3 refers you to page 5-25 for more details.

[Black Bart]

Actually,

I took it that he was asking about the partners rather than the managers (although they may be the same people).

Is that right, gwt?

[Unregistered]

Actually

There is no such thing as a partner in an LLC. There are members in an LLC, some of whom may exert a managerial role.

[Bees Knees]

There is no difference between the partners and managers in an LLC for SE tax purposes. The IRS tried to issue regulations that would distinguish the two, but those are the regulations that Congress threw out back in 1997.

[JON]

Attorneys

in Minnesota give LLCs the following terminolgy- MEMBERS (owners), GOVENORS (board of "directors") and MANGERS (officers). Who cares would probably be a better question. When do you think there will be an attorney in everybody's family...????

[Armando Beaujolais]

The core of the problem is liability of partners/members/sorta owners, whatever you want to call them. Regulations define "general partners" (subject to SE on dist. share) as partners who have liability for partnership debt. On the flip side, regs clearly define "limited partners" as partners who do not have liability for partnership debt (not subject to SE on dist. share). The entire discussion of SE tax for partners or equivalents is based on exposure to liability, and that exposure is determined by state law.

Then come LLC's, created by states to allow partnership behavior, but without forcing at least one partner/member to be exposed to liability. LLC's are, by definition, not corporations, so they fall under the definition of partnerships in the IRC. But that can't be, can it? Under regulations, a partnership must have at least one general partner (liability exposure under state law). LLC's have no such person involved. So no, an LLC can't be a partnership under regulatory definitions. So, yes, regulations provide for partnership taxation for LLCs. No, yes, no, yes, maybe, who knows?

Is an LLC member/manager/sorta owner comparable to a general partner, or a limited partner?

It's gonna take federal legislation or a Supreme Court decision to fix it.

Just don't forget that earnings for services performed are guaranteed payments, subject to SE tax for everybody, treated as if the person earning the payments was not a member of the partnership. SE tax on remaining earnings? I dunno. And I don't think the IRS knows. But you gotta be careful, because one day they might come down with a new law or court decision that give the IRS a green light to go after all those LLCs that paid distributive shares without anyone paying SE tax. But it might not too.

[OldJack]

Just don't forget that earnings for services performed are guaranteed payments, subject to SE tax for everybody, treated as if the person earning the payments was not a member of the partnership. SE tax on remaining earnings? I dunno. And I don't think the IRS knows. But you gotta be careful, because one day they might come down with a new law or court decision that give the IRS a green light to go after all those LLCs that paid distributive shares without anyone paying SE tax. But it might not too.

But if the LLC-1065 member takes no distribution designated as for services performed (even though daily services have been performed) then should guaranteed payments be report on the 1065 and SE tax be paid on the 1040? This question of SE tax on LLC earnings is best described as that "gray area" that your LLC client should decide what tax position to take on the issue. It is really not the tax preparers right or responsibility to make such decision.

[Armando Beaujolais]

But if the LLC-1065 member takes no distribution designated as for services performed (even though daily services have been performed) then should guaranteed payments be report on the 1065 and SE tax be paid on the 1040? This question of SE tax on LLC earnings is best described as that "gray area" that your LLC client should decide what tax position to take on the issue. It is really not the tax preparers right or responsibility to make such decision.

You're missing the distinction between "guaranteed payments" and "distributive share."

There's no gray area in the definition of guaranteed payments and treatment by individual recipients.

The gray area revolves around SE tax for distributive share. TRA 97 that started all this said that no new regulations could be issued under IRC section 1402(a)(13) until 1998 (still not issued). Section 1402(a)(13) talks about "there shall be excluded [from SE tax] the distributive share...of a limited partner."

You have to be careful about defining the boundaries of a gray area. There's no logical link to say that because treatment of distributive share is a gray area, that gray area also covers guaranteed payments. Guaranteed payments are discussed in separate code and regulation sections, and the definition of guaranteed payments is not involved in the mess of laws and regulations by Congress and the Secretary that created this conflict in the first place.

[Black Bart]

Actually,

There is no such thing as a partner in an LLC. There are members in an LLC, some of whom may exert a managerial role.

you're startin' to assert the role of a professional nitpicker. I'm gonna give it the old college try one more time and then I yield (I'll give politics a rest if you'll give me one). For the record, even I know that an LLC has members and a partnership has partners.

Now, it seemed to me he thinks partners in partnerships that are not LLCs owe SE tax on shares and partners in partnerships who are LLCs (whose partners are also usually "members") do not. He wanted confirmation. Rosie says he was talking about LLC managers. Maybe he was. Would you like to clear it up?

[Bees Knees]

Now, it seemed to me he thinks partners in partnerships that are not LLCs owe SE tax on shares and partners in partnerships who are LLCs (whose partners are also usually "members") do not. He wanted confirmation. Rosie says he was talking about LLC managers. Maybe he was. Would you like to clear it up?

The regs the IRS tried to push on everyone back in 1997 tried to make a distinction between LLC “members” and LLC “managers.” In other words, if you actually performed services as a “manager” you would be subject to SE tax. If you were simply a “member” (or Joe average partner) in the role as an investor, you would not be subject to SE tax.

Those are the rules Congress threw out when they told IRS to back off. Nobody has done a single thing about this since, and so all bets are off. Personally, I advise my clients to take the S corp approach. S corp shareholders are subject to FICA on their wages, but not on their line 1, K-1 distributive share of profits. I tell my LLC clients to figure how much is for services rendered and how much of it is a return on their investment. Any income they get from services should be treated as a guaranteed payment (subject to SE tax), and the remainder treated as a return on their investment (line 1, K-1 distributive share of profits - not subject to SE tax).

[rosieea]

you're startin' to assert the role of a professional nitpicker. I'm gonna give it the old college try one more time and then I yield (I'll give politics a rest if you'll give me one). For the record, even I know that an LLC has members and a partnership has partners.

Now, it seemed to me he thinks partners in partnerships that are not LLCs owe SE tax on shares and partners in partnerships who are LLCs (whose partners are also usually "members") do not. He wanted confirmation. Rosie says he was talking about LLC managers. Maybe he was. Would you like to clear it up?

I interpreted the original post to be asking about the SE tax liability for pass-through income of partnerships vis-a-vis LLCs. SE tax on pass-through income is only an issue for general partners, and, therefore, the question is whether managing members of LLCs are treated as general partners for this purpose. Whether an LLC must have a member-manager, or can have a hired, non-member manager and no managing members is doubtless a matter of state law.

[OldJack]

You're missing the distinction between "guaranteed payments" and "distributive share."

There's no gray area in the definition of guaranteed payments and treatment by individual recipients.

Armando you are missing the point that I was making.

There is a gray area regarding guaranteed payments when the LLC-1065 member takes distributions but does not take guaranteed payments even though services were actually provided. Is it the tax preparers job to reclassify current or prior earning distributions as guaranteed payments?

Then there is the gray area when no distributions are paid for current year earnings but services were actually performed. Should guaranteed payments be reported in the current year when none were actually paid or in future years when distributed when no services were actually provided?

True the code defines guaranteed payments but that is little help.