Guaranteed Payment - Two Person LLC - Changing the number of Guaranteed Payments

[Ajschmit1]

My wife and I have a two person LLC for a side hustle social media marketing company we have. No employees, just the two of us. In the past, we both put in equal amounts of work and alternated months that we took a guaranteed payment.

Recently, my wife has taken over all the day to day work and we agreed she should get each monthly guaranteed payment because of this.

Do we just start cutting each monthly guaranteed payment check to her and change the amount to reflect this when we file for this tax year or do we have to wait to do this until next tax year?

Do the guaranteed payments have to be equal for both partners or can we determine if just one partner gets the guaranteed payment?

Appreciate any info.

[NateTheGrEAt]

Hi @Ajschmit1 - thanks for writing in today!

Partners can receive unequal amounts of guaranteed payments, and it is common for one partner to receive more than the others if that partner is doing a larger share of the work. You can simply start giving her more payments and not paying you one. As you noted, you'll need to ensure that each partner's correct total of guaranteed payments is reflected on the Form 1065, Schedule K-1 that is produced when you file your business taxes for this year. You may also want to speak to your business attorney to determine if anything needs to be changed in the partnership agreement to reflect the new guaranteed payments. 

I hope this helps answer your question!

[Ajschmit1]

Thanks for your answer! One follow up question: Comparing two people each receiving half of the total Guaranteed Payments vs one person receiving the total Guaranteed Payments - does that change our individual Self-Employment Tax? In other words, is it be the same as previous years or will the partner receiving the most of the Guaranteed Payments pay more in Self-Employment Tax and the other pay none or a nominal amount of Self-Employment Tax.

Thanks for the insight!

[NateTheGrEAt]

Generally, the person who receives the income pays the self-employment tax, so shifting the payments in this manner will allocate more of the tax to one person. However, this won't make a difference in your total tax outcome, as the self-employment tax rate is the same for each individual. If you file jointly, you combine both of your self-employment tax on one return, so shifting the tax from one person to the other has no impact on the total outcome. 

The one exception would be if either of you individually exceeded the Social Security Wage Base (~$160,000 in 2023) in a combination of wages, guaranteed payments and other self-employment income. At that point, that individual would no longer accrue self-employment tax at the same rate.