[kanba]

There is a question from becker as following:

Guaranteed payment from services rendered to a partnership $50000, ordinary income from a S corp $20000. What amount of income is subject to self-employment tax? The answer is $50000 guaranteed payment?

I cannt understand this and what kind of income are subject to SE tax?

[The Ace]

kanba,

I have not really seen this explained well in Becker, Wiley, or Yeager but I know this from being in practice so don't be frustrated.

For SE tax all sole proprietorship income is SE income.

For partnerships and LLC's if the member is active they pay SE income on all distributions and guaranteed payments. If they are not an active participant (limited partner or non managing member of LLC) they only pay SE income on guaranteed payments.

For an S Corp, you dont pay SE tax on distributions and there are no guaranteed payments in an S Corp. Guaranteed payments will show up in the form of salary on a W-2 which both you and the S Corp will pay payroll taxes on, thus eliminating the need to SE tax. This is why many S Corp owners will take very small salaries and then remove the income as distributions to avoid paying payroll taxes and just be subject to a higher tax on their 1040 (although the IRS is very keen to this).

I hope this helps, its a very tricky and nitpicky subject just like all of REG is.

Ryan

FAR - 79 - 11/24/10
AUD - 85 - 2/19/11
BEC - 83 - 7/25/11
REG - 74 - 8/22/11 Rematch 11/21/11
IL Candidate

[Yvonne570]

Guaranteed payment is personal business income for additional services performed for the partnership. The partnership is basically acting as if they are paying another business for the services performed and thus the money received would be identified as SE income.

Ordinary income from a S corporation does not pertain to the SE taxes. Income received from an S Corporation is treated as wages. Individuals are identified as employees instead.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[See Pee A]

Guaranteed payments are just like salary. Think of it as a guaranteed payments are unrelated to whom they are actually paying. It could be a partner or an IT consultant. If you were an IT consultant, you wouldn't expect your client to be paying the taxes and everything for you. They simply expense it, and you would have to report it as your income and then deduct the appropriate FICA, FUTA, blah blah on your own. Hope this helps!

BEC 86 (08/30/11)
FAR 84 (10/13/11)
REG 88 (11/08/11)
AUD 86 (11/29/11)

Exam prep - Becker self-study

[Author]

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