K1 treated as unearned income

[lavagirl808]

I am under 21 and am an active partner in a business that issues me a K1.  In entering the K1 information I am indicating I am an active partner.  Turbo Tax is categorizing this as unearned income and asking me to file 8615 because of my age and then treating the K1 income as unearned income taxed at my parents tax rate.  How do I get TT to characterize the income as earned?

[Anonymous_]

Is there a figure on Line 14 of your K-1?

[lavagirl808]

Yes. 

[Anonymous_]

Then you simply need to check the box and enter that figure in TurboTax.

[lavagirl808]

No.  I could be making a mistake.  I have gone through the 20+ screens for entering the K1 data multiple times.  In that process, I have verified that I am active rather than passive partner.  I have entered 14A Self-employment earnings.  TT is accepting the numbers.  It is just categorizing everything reported on the K1 as unearned income.  I don't know why.  Because of this it is asking for a Form 8615, Tax for certain children who have unearned income.  I don't have unearned income.  If I complete the 8615 to proceed with tax prep, TT  taxes the K1 income as unearned income under my parents tax rate which is not right. 

[Rick19744]

A couple of questions:

• What box is checked on your K-1 Part II line G?
• Where is the information showing up on your Schedule E Part II?
  • Passive or nonpassive section?

[Anonymous_]

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@lavagirl808 wrote:

No.  I could be making a mistake.

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Yes, something has gone off the rails. 

Please provide more details, including those requested by @Rick19744.

[lavagirl808]

General Manager or LLC member-manager.  This is also what I selected when entering the K1 information into TT. 

IDK.  How do I get Turbo Tax to show me what it is doing behind the scenes filling in the actual forms like Schedule E?

[Anonymous_]

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@lavagirl808 wrote:

IDK.  How do I get Turbo Tax to show me what it is doing behind the scenes filling in the actual forms like Schedule E?

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You cannot see what is happening "behind the scenes" with an online version of TurboTax. You need tio be using a desktop version and enter Forms Mode for that purpose.

Regardless, unless the figure on Line 14A is less than around $433, TurboTax should be generating a Schedule SE and calculating self-employment tax.

[lavagirl808]

Unfortunately this is the online version so not sure what forms being populated.  TT phone support going to call me back tomorrow with someone good with K1 to help.  I will post solution if we come up with one in case someone else encounters this issue with online version.

[SweetieJean]

Were you under age 18 on 12/31/2021?

[Rick19744]

@lavagirl808 

Some follow-up comments:

• There are a number of questions and some answers may lead to other questions
• Before you have your call with TT read the instructions to form 8615 and in particular the section on earned income
  • Capital is material. Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment.
  • Capital is not material. In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership.
• I am sure that the TT representative will have other questions, but just wanted you to understand the above before you speak with TT.

[lavagirl808]

Thank you.  This is has got to be the issue.  I think I understand.  The business is about 15% capital and 85% our labor converting materials into saleable goods.  We wrongly assumed ok to just disperse income instead of paying ourselves wages for our manufacturing labor.  Now seems like better to issue guaranteed payments for our labor so that our "earned income" is clearly coded into 4a, "guaranteed payments for services" ,and little income left over for box 1 for interpretation as capital income or personal service income.  Hope TT rep can walk through how to sort this out for 2021 and in future.

[lavagirl808]

No.

[Anonymous_]

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@lavagirl808 wrote:

We wrongly assumed ok to just disperse income instead of paying ourselves wages for our manufacturing labor.  Now seems like better to issue guaranteed payments for our labor so that our "earned income" is clearly coded into 4a,,,,,,,,,,

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It is wise to contact Support because there has to be some other issue.

If there was a figure on Line 14A (as you indicated earlier), then TurboTax should have calculated self-employment tax.