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dbooksta
Level 2

K-1: Are Self-employment earnings part of Ordinary business income?

If someone is a member and active participant in the business of an LLC then, for purposes of a K-1, what is the distinction between the values that go in Box 14 "Self-employment earnings" and Box 1 "Ordinary business income?"  Is there a publication that explains the accounting difference?

 

I can't even tell: If a dollar paid out to a member is Box 14 then is that dollar not included in the sum reported in Box 1?

4 Replies
TaxT2021
Employee Tax Expert

K-1: Are Self-employment earnings part of Ordinary business income?

Hi Dbooksta

 

I am glad to be able to help you.  Hope that you are doing great!

 

If I understand your question correctly

  1. A person you know is an active participant in an LLC
  2. That LLC is taxed as a partnership
  3.  You need  clarity in the purpose of  K-1 boxes 1 and 14

Here goes:

  • Box 1 of schedule 1065 K-1  = net earning of the business and attributed to you via partnership agreement
  • Box14 of schedule 1065 K-1 = That portion of box 1 that is from self employment (your active efforts not investments)
    • In other words if your K-1 reports $XXX  from your active efforts in the partnership
      • Box 14 (code A ) would report $XXX  for self-employment tax purposes
        • Self-employment taxes are those related to Social Security and Medicare
          • They amount t 15.3% (12.4% Social Security tax plus 2.9% Medicare tax).
    • However, you really only pay  50% (7.65%)

 

So to answer your final question, a $1 earned by a member and reported in box 1, would also be a $1 that may be taxed the net payroll tax equivalent of 7.65%.  

 

SE tax kicks in when earnings from self-employment are $400 or more.

 

I hope this helps!  

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Mike9241
Level 15

K-1: Are Self-employment earnings part of Ordinary business income?

there are two taxes on active participation in a non-passive activity. the regular income taxes on box 1 income. if there are guaranteed payments on 4a or 4b those are also subject to income taxes but only 4a would be subject to SE tax self-employment tax (schedule SE). so one should see box 14 being equal to the sum of boxes 1 and 4a.  

you would be out of pocket 100% of the SE tax less the tax benefit you get from the deduction for 1/2 of the SE tax you paid. 

 

 

so assuming $100,000 in box 14 and you're in the 24% bracket the cost of the SE Tax would be

 

100000 * .9235 * .153 = 14130 = se tax

14130 /2 * = 7065 deduction for se tax

7065 * .24 = 1696 = tax savings on SE tax deduction

net SE tax cost 14130 - 1696  = 12434

or a net out of pocket of 

dbooksta
Level 2

K-1: Are Self-employment earnings part of Ordinary business income?

If the member is not taking a salary/wage, so there are no "guaranteed payments," but the member is an active participant in the business, then Box 14 = Box 1?

JK797
New Member

K-1: Are Self-employment earnings part of Ordinary business income?

I have entered everything on the K-1 but #20 code Z stmt.   on Statement it says w-2 wages 19973 and ubia 6048.  in turbo tax it will not accept it.  I enter code Z and 19973 and it tells me its an error.  Ordinary business income was -39, This partner was paid 52,000.  Is it giving me the error because there was a loss or am I doing it wrong?

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