K1 Form 1065 and self employment tax question

[KSrB2000]

I have a generated from my accountant K1 where I am a general partner and my box 1 is a loss, but my guaranteed payments for services is much higher.  I'm doing my personal taxes now and Turbotax is saying I don't have to pay self employment tax and that matches my K1 where box 14 is empty, but shouldn't I have to pay self employment tax?

[PatriciaV · Accepted solution]

You may wish to contact the accountant who prepared the Partnership return to verify that your guaranteed payments were not reportable. Generally, a general partner of a partnership would have an amount in Schedule K-1 Box 14. That amount would flow to the Self-Employment Taxes worksheet to calculate the SE Tax due.

[KSrB2000]

Thank you for the help Patricia.  That's what I thought.  I asked the accountant about it and this is the response I got.

"Guaranteed earnings are subject to SE tax automatically.  The box 14 is for box one flow-through residual income not guaranteed through direct payments."

I don't really understand it though.  Does this make sense to you?  Is there a better question I should be asking them?

[PatriciaV]

While your accountant is partially correct, guaranteed payments are added to the flow-through income to arrive at the amount in Box 14a. 

Per the IRS Instructions for Form 1065 Schedule K-1 Line 14a, the Worksheet for Figuring Net Earnings (Loss) from Self-Employment lists Guaranteed payments on #4a.

[KSrB2000]

Hi Patricia,

Thanks for all your help I just want to make sure I do this correctly as it's my 1st time.  Here is what the accountant said.

"Since you are an LLC, not a partnership, the flowthrough is not subject to SE tax, only the guaranteed payments, hence they are not combined, which is different than a standard partnership."

This still seems odd to me since I feel like everywhere I've read starting a business that you need to pay self employment tax.  Does this make sense?  If I'm not paying self employment tax won't it also mean I won't get money put into social security to calculate my benefit when I retire?

[ThomasM125]

An LLC is taxed as a partnership by default if you have more that one member. I'm not sure about the distinction between an LLC and a partnership as far as taxes are concerned accept to say the default tax return for both of them is a Form 1065, partnership return. I agree with you that you should pay social security/self-employment tax on your earnings from the partnership if you are actively engaged in its operations. The only time this may not apply is if the partnership in operating at a loss and there isn't income  from which to pay compensation. The only way your income from the partnership is going to be subject to self-employment tax is to make an entry in box 14 of the schedule K-1. And you are correct, if you don't pay into the social security system you won't be getting credit for taxes paid into the system which will reduce your benefits at retirement.

[KSrB2000]

Hi all, esp Patricia,

Thank you for your help, I've marked your 1st answer as correct.  The accountant I used was either negligent or made a mistake.  He's corrected my K1 and box 14 now correctly has SE tax as 1 would expect for a business like mine.  You saved me from a mistake and a potential audit.