I am a 50% owner of an LLC. Over the course of 2013, my business partner and I paid ourselves about 1/2 of the company's income as monthly installments which we are calling guaranteed payments. We recognize that these payments will be subject to self-employment tax. Do we need to pay self-employment taxes on the other 1/2 of the company's earnings, which were distributed as profits?

ANSWER

The BIDaWIZ Team's Answer:

Given the LLC is treated as a partnership in this case, all of an owner's share of the LLC's earnings, whether an allocated share of income or a guaranteed payment, is subject to self-employment tax. This is referenced in the Internal Revenue Code Section 1402(a). There's one exception to this rule. Section 1402(a)(13) states that the distributive share of income or loss of limited partners, other than guaranteed payments, will be excluded from net earnings from self-employment income. This would be the only case in which the partnership income would not be subject to self-employment tax. However, neither of you appear to be limited partners based on the facts and circumstances that you've provided.