Hello to all reading this post, I have a question about the guaranteed payment and taxes. I have read that the guaranteed payment for services that a member/owner provides for the L.L.C. is subject to self-employment taxes. Is this guaranteed payment also subject to taxes at the member/owner marginal tax rate? Thanks to all for reading this post and providing a response
depends.
if the LLC is taxed as a corporation, the LLC pays corporate taxes, distributions will be taxed as dividend income to the member/shareholder.
if the LLC is taxed as an S-corp, LLC income will pass through to the members personal returns and be subject to marginal income and SE tax. If the member takes a reasonable salary from the LLC, then the member may avoid the SE tax. Either way, cash distributions are not a taxable event to the member; the income has already been taxed.
if the LLC is being taxed as a partnership, LLC income will pass through to the members personal returns and be subject to marginal income and SE tax. No SE avoidance is available. Cash distributions are not a taxable event; the income has already been taxed.
if the LLC is being taxed as a sole proprietorship, LLC income is taxed at the member’s marginal rate, and subject to SE tax. As a sole proprietorship, there is no “distribution” per se.
Now, if by “guaranteed payment” you mean salary, then it is subject to regular FICA/Medi and income taxes. This salary and employer’s portion of FICA/Medi, however, is a deductible business expense and reduces LLC income that is taxed as above. Note that you pay tax on this money regardless (either as salary or LLC income).
If by “guaranteed payment” you mean you are simply distributing cash that has already been taxed, then no, distributions are not taxed (unless the LLC is taxed as a C-corp) as above.
If you mean something else by “guaranteed payment,” please let us know and we’ll fill you in.
Hello, McWagner, thanks for the reply. The guaranteed payment is the term that designates the payment that an owner receives providing services for the L.L.C. as acting as an employee. (although he is not an employee). In addition, in this scenario, the owner is to be paid for his services that he provides for the L.L.C., and he is entitled to receive profit distributions (based upon the percentage of the allocation of distributions he is owed). The L.L.C. assumes a partnership format. From the information you have provided, it seems the owner providing services to the L.L.C., will have to pay Self employment taxes and taxes at his marginal tax rate on the guaranteed payment received. (I am not referring to his allocation of distribution or profit distributions) Is the previous statement inaccurate?
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership’s income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner’s distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding by the partnership, but will be taxed at the individual level.
The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership’s other ordinary income. All this income will be subject to income tax and SE tax.
so, no, your statement is not inaccurate.
McWagner, thanks for the indepth response. You really presented alot of details. Thanks again.