LLC Member paid wages?

[KarenMM]

Good morning -
I picked up a new client - Husband and wife LLC members running a restaurant. H worked and was paid W2 wages for first half of 2018; then stepped away but still being paid wages. W has not been paid anything yet, but just stepped into actively running the business. H&W want to be "paid equally", since it is a 50/50 LLC taxed as partnership. Any ideas how I can fix this? I have told them to immediately stop paying wages to H. I am tempted to have them pay W through W2 the same amount as husband has been paid to make them equal, and then to pay them both a guarenteed payment after that. I know it is wrong, but I don't know how else to fix this. H&W have filed, and will continue to file as MFS on their individual returns.

[kathyc2]

Why not file amended payroll tax returns to remove H paychecks and reclass the net of checks he received to guaranteed payments? Following is not what you asked, but proceed with caution on this account. H&W businesses where one or other feels they aren't being treated fairly by other can get quite ugly.

[Burke]

Yeah. And they are already filing separately for a reason......

[kathyc2]

Yeah. And they are already filing separately for a reason......

I just got out of one where they were both constantly trying to drag me into their family drama. Huge weight lifted to no longer have to deal with them.

[Burke]

Go, girl! Life is too short.

[Toobusy]

Per IRS, husband/wife LLC taxed as a Partnership can not be paid W2. Must be paid guarantee payment. The downside to that is if they have dependents and qualify for EIC, they can't get it. I agree with Kathyc2 response- it is the best solution I can think of.

[TaxGuyBill]

The downside to that is if they have dependents and qualify for EIC.

No, the income from the Partnership is still "earned" income that qualifies for EIC.

[Toobusy]

TaxGuyBill Partnership Income is report on Form 1040, Line 17 (old form). Income on that line Do NOT qualify for EIC. Now, for husband and wife it depends on the state they you live in. For example, in FL if a partnership has incorporated and they are husband and wife they must file a partnership return, thus preventing them from getting EIC if they qualify. But if they are unincorporated, they can be a partnership and get EIC by filing schedule C.

[spanel]

TaxGuyBill Partnership Income is report on Form 1040, Line 17 (old form). Income on that line Do NOT qualify for EIC. Now, for husband and wife it depends on the state they you live in. For example, in FL if a partnership has incorporated and they are husband and wife they must file a partnership return, thus preventing them from getting EIC if they qualify. But if they are unincorporated, they can be a partnership and get EIC by filing schedule C.

Wow, just Wow. Not even sure how much information in this is incorrect on your post.

Income from 1065 does qualify for EIC.
Cannot incorporate a partnership unless its an LLC, then they couldn't file on a sch C in the first place.


Chris

[Dude]

technically husband and wife llc can file sch c even if they equally share in the responsibility of running the business. In this case the husband taking w-2 reported wages makes it more complicated. I would think the husband with w-2 wages is an employee and she is a sole proprietor.

[kathyc2]

technically husband and wife llc can file sch c even if they equally share in the responsibility of running the business. In this case the husband taking w-2 reported wages makes it more complicated. I would think the husband with w-2 wages is an employee and she is a sole proprietor.

Sch C only works in community property state. If LLC Articles of Organization state both are members, you can't just decide that one is a SP and one is an employee.

[Dude]

Sch C only works in community property state. If LLC Articles of Organization state both are members, you can't just decide that one is a SP and one is an employee.

First, yes you can do a Sch c in non community prop state as long as all SE tax and income is reported. Second, an LLC is a designation given by the state not the fed. Compliance is determined at the state level and the LLC can be changed at anytime. From what the original poster said, this is NOT a partnership it is a sole proprietorship where the husband is an employee and the LLC should be changed to reflect that. If you are going to reclassify they paychecks given then do two schedule C's and split the earnings and expenses this year. Next year change the LLC so that the wife is sole proprietor. Again, this is NOT behaving like a partnership so why file as one?

[kathyc2]

First, yes you can do a Sch c in non community prop state as long as all SE tax and income is reported. Second, an LLC is a designation given by the state not the fed. Compliance is determined at the state level and the LLC can be changed at anytime. From what the original poster said, this is NOT a partnership it is a sole proprietorship where the husband is an employee and the LLC should be changed to reflect that. If you are going to reclassify they paychecks given then do two schedule C's and split the earnings and expenses this year. Next year change the LLC so that the wife is sole proprietor. Again, this is NOT behaving like a partnership so why file as one?

If they want to keep the limited liability protection of forming an LLC they need to follow LLC rules.

"If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities."

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

[Dude]

I don't believe LLC protection is dependent upon how one files their taxes. If you feel better doing a partnership return go for it. My point is they dont have to nor in this case should they claim partnership status. This default classification applies to REAL husband and wife teams, not the one described here.