Entering Guaranteed Payments?

[charles8]

I'm currently using Turbo Tax Business for Windows to do my taxes for a LLC partnership.  We have a total of two partners, but I can't seem to find where I'm supposed to put in the guaranteed payments in TurboTax.  When entering the details for a partner, I get a screen for the partner's contact info, a screen to choose whether  they are a general or limited partner, a screen asking about whether the partner actively runs the business and is a US citizen, a screen asking about their percentage of ownership, then the final screen asking about last year's ending capital balance, cash and property distributed and received, but nothing about guaranteed payments.  The lines on the last pages specifically say NOT to enter guaranteed payments there.  But I can't find anywhere to add them in TurboTax so that the program will generate the proper K1 forms automatically, with the guaranteed payments listed.  Where do I got to enter Guaranteed Payments?

[JulieCo · Accepted solution]

Guaranteed payments will be entered in the Compensation and Benefits section of TurboTax Business.  You have a couple options to find this section:

Option 1:  Type "guaranteed payments" in the FIND field at the righthand top of the screen.  Select "Jump To guaranteed payments" and you will be brought to the screen to enter this information.

Option 2:  From within the Federal Taxes tab at the top of the screen, select the Deductions tab.  Then under the Compensation and Benefits heading, you should see an option to START "Guaranteed Payments"  Sample screenshot is below. 

[tjudge530]

Hello, 

is guaranteed payments also available in Turbo Tax Self Employed? 

Essentially to reduce taxable income or self employment tax by using guaranteed payment (a salary expense) and leaving the rest of the income in the LLC or applying the Self employment tax to the remainder?

For example, suppose the LLC makes 120,000, can I use a guaranteed payment to self for half the income and leave the rest of the income in the LLC? 

If so, is there a place to enter this into Turbo Tax Self employed online? 

Thank you! 

[DanielV01]

If the LLC is a sole-member disregarded entity, the answer is no.  The sole member is filing on Schedule C, and a sole proprietor is not allowed to take a salary or make a guaranteed payment like a Partnership may.  This is one of the reasons why an LLC is called a "disregarded entity" by the IRS, because although you may be running the business like a corporation, for example, in the IRS' eyes the title LLC means nothing taxwise.  The business is still a sole proprietorship by default and is therefore taxed as a sole proprietorship.

But if you the LLC is earning that type of income, there is an option:  make an election to be taxed as an S-Corp.  Having an LLC structure does allow this by filing Form 2553.  In that structure, the corporation pays the "Sole Shareholder" what the IRS calls reasonable compensation, which are wages paid and reported on Form W2 with payroll taxes withheld and paid.  Above the reasonable salary, any earnings by the corporation are "passed through" to the sole shareholder, and claimed on the shareholder's personal tax return.  That income that is passed through is not subject to Social Security and Medicare (FICA) tax, and also might qualify for the Section 199A QBI deduction, as discussed in this Help Article:  What is the Qualified Business Income (QBI) deduction?

There are other factors to consider as well before making the election (note:  this is a taxing election and not a legal entity change, but in any questions of doubt, consult an attorney for legal advice).  Chances are strong, however, that if your "cleared income" from your LLC is close to what is stated in the example you provide, an S-Corp election might be right for you.

And in that structure you are also able to do what you ask about in your question:  keep the money in the business.  When you do take any money out (that has already been reported as pass-through income on the personal tax return), this is called a distribution and is generally non-taxable (since it has already been taxed).

[tjudge530]

Thank you Daniel. 

Would that approach still make sense if the income to the LLC is variable?

Also, does that conversion to an s corp increase the reporting burden?

[DanielV01]

To your first question, it depends.  Because of the need to pay "reasonable compensation", if the earnings of the LLC are typically much lower than supposed, S-Corp status can be counter-productive.  It is usually a more favorable status the higher the LLC's income.

To your second question, there is more reporting.  The W2-income alone will have several requirements:  You'll have to remit Federal taxes at least quarterly, and maybe monthly, and file Form 941 quarterly.  You will have to make deposits for the Federal Unemployment (FUTA) and file Form 940, state tax requirements, if your state has a state tax.  Your state might have a specific corporation tax for S-Corp elections, and some states have local taxes, and State Unemployment (SUTA) as well, as well as filing the W2s themselves at the end of the year.  And you will file a separate tax return for the business, Form 1120-S (available in TurboTax Business), which will report on a Schedule K-1 the income that must be reported on the personal tax return.  This extra filing is part of the formula to determine if this filing is right for you.

In the end, you will want to research to find the best solution for your situation.