K1 income from an LLC taxed as a partnership and self-employment tax

[Ctmom]

I have K1 income from an LLC taxed as a partnership. I believe I am a limited partner legally, but have over 500 hours worked in company. Income wasn’t guaranteed payments, but I believe from what I’ve read that I still need to pay self-employment tax on the income. Turbo tax did not include that income in my self employment income. Is that correct or should I add the income into line 14 on my k1 when entering in turbo tax?

[Rick19744]

LLC's and SE tax is a difficult area.  This is because there are only proposed regulations that have  been out since 1997 and as a result positions are taken across the board; conservative to aggressive depending on the facts in each case.

Also keep in mind that the definition of limited partner/member differs for legal and tax purposes.

The K-1 form really only provides for two options; either subject to SE or not subject to SE.  This result depends on which box is checked in Part II line G.  If the member manager box is checked software will most likely subject all earnings to SE tax.  If the other LLC member box is checked the software will most likely not subject any of the earnings to SE tax other than if guaranteed payments are reflected in Part III line 4.

So in your case, I am assuming that Part II line G is marked as other LLC member.  Changing this to member manager in the interview screen input for the K-1 should subject all your earnings so that they are subject to SE tax.

There are a number of other issues that should be addressed by the preparer of the K-1, but that discussion is beyond the scope of this forum.

[jkearns]

Rick - I have marked members as "Other LLC Members" and their K-1's do not show self-employment (which is correct), however, Line 14c on Schedule K still shows a figure for Gross nonfarm income.  My CPA indicates that this should be $0.  Is their anyway to edit this line item? (the income is coming from another LLC k-1 (Box 1).  Any guidance you could provide is greatly appreciated.

[Rick19744]

If the code is B don't worry about it.  Many software packages show this.  It is informational and only used when needed by the appropriate taxpayer.

[jkearns]

Great - thank you.

[RB287a]

This is a great thread with much good info, but it kinda dwindled on specifics at end. Box 14, Code C is gross non farm and really it should not be there (nor code B for that matter) IF that K-1's member is listed as Limited or Other LLC Members. In the past I've noticed Turbo Tax for Business will sometimes not update this properly on importing last yrs member data on doing form 1065. And also if you go into the edit member data and make sure you finish it totally before backing out.   I remember seeing this show up on K-1s as folks said here for limited or other members. I've made it fix by going back into TB Tax's edit member data and again choosing "limited other member" and then finishing it all the way through the questions for that member data edit.

Bottom line if you participated more than 500 hrs you should not have been designated as "limited or other member" on the K-1 by whomever did the 1065 return. If the member is doing that much work (or other mitgating circumstances listed elsewhere in TB Tax's help files) then that member should be edited to "General Partner or Managing member" when the 1065 return is done and filed.

[Help-needed]

Saw your post was just my problem. tried what you said and it still is not working

[RB287a]

Help-needed wrote:
(Saw your post was just my problem. tried what you said and it still is not working)
---------------------------------

It's buggy sometimes on this. There's 2 ways to work around it.
(1) you can start over with a new Tax Return (Slightly different Name, initial etc) and this time go directly to the members data entry BEFORE putting in ANY income data. Make sure the "limited or other member" is listed as such. Of course this is if the member is in fact limited and does not work for the LLC in an active capacity. Then proceed and it should stick.
(2) Or what I did one year to get the Self Employment income off the limited member (there's only 2 members in ours) was just special allocation payment to the active member of the regular income (not passive income). If you have more than 2 active members you'd have to fraction it out to whomever was Active vs whomever was Limited members. The special allocation pmts to specific members can be hard to spot in the TT for Business menus. Best I remember (it was several yrs back) down at bottom of the window it said something going in like "Are you making special allocations pmts to any members". And if you chose yes then later it asks which members and that's where you fill it in.
Usually the entity doing the K1 is the same entity doing the form 1065 with Turbo Tax Business. So I speak from that scenario. Good luck with it.
BTW Today March 15 is the deadline for filing the LLC and/or Partnership Tax Return. It's a hefty fine if you don't file or contact them about filing an extension.