@Pawn Maker
Ques. Freeman, a single individual, reported the following income in the current year:
*Guaranteed payment from services rendered to a partnership $50,000
*Ordinary income from an S corporation $20,000
What amount of Freeman's income is subject to self-employment tax?
a. $0
b. $20,000
c. $50,000
d. $70,000
Explanation :- Choice “c” is correct. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self- employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation are taxable income to the individual or their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).
My thoughts:
I thought that if you were a member of a partnership or an S-Corp you would have to pay taxes on all of the income from these pass through entities, whether they consisted of guaranteed payments, dividends, ordinary income earned from your % ownership, cap gains, % collection of receivables, royalties etc. On the face of the K-1 it seems as though each of these are summed (to line 14) to give you your total K-1 income, which is then subject to SE Tax. The SE form then indicates that you're supposed to bring in the K-1 Line 14, along with any $ earned from schedule C or F and run the formula to determine your SE Tax. Now, these exceptions coming about with “limited partners” and such, which were never explained in the book/lecture are throwing me for a loop.
HELPPPPPPP! 🙂
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