Having enough money to pay quarterly tax estimates

[danielle-51]

If a partner in an LLC has not set aside enough money to pay for their quarterly tax estimate, is it okay to transfer money out of our business bank account to their personal bank account to make up the difference? Or do you have to give that money in the form of a guaranteed payment since it will be used for paying taxes? This is a family owned LLC, so this would be easy to do either way. We just don't want to make a transfer that is solely for the purpose of paying taxes if you can't do it that way. It seems like you should be able to transfer your own money the way you want, but again, since you would be doing it only for the purpose of helping that partner pay their taxes, then it might have to be in the form of a guaranteed payment, which would then be taxed as well. The reason I am asking is because we are trying to figure out how much each partner will need weekly to cover not only their living expenses, but what they will owe in quarterly tax payments, and it is a little hard to know for sure what that amount should be when you have never done it before. So if it becomes clear as we move on that more has been spent on living expenses, and not enough was set aside for taxes, then I wanted to know what to do. We want to get it right. We have a good idea of what will be owed, but in case we are off, I want to be prepared before April 15. We have been giving out the guaranteed payments since the first week of this year. 

[Mike9241]

a partnership can make unequal distributions to partners.  making guaranteed payments makes no sense especially if they're proportional to ownership. that could be a partnership deduction which means that all the partners would get a benefit (page 1 line 10 deduction) while he would be taxed on 100%. by the way that's what partnerships generally do. make distributions to partners to help them pay taxes on the income the partnership earned. 

* guaranteed payments serve two purposes  - 1) to compensate partners for services when the services performed don't match up with their ownership (example two 50/50partners - profit and loss sharing - but one spends 2000 hours performing services while the other spends only 500)  or a return on invested capital.  guaranteed payments for services are subject to self-employment tax 

* Another example: 2 equal partners in a non-passive activity each performing the same hours of service. before GPs the partnership earns $100K. each partner gets a GP of $25K.  thus the partnership now has $50K net income split 50/50.  so each partner reports as income $25K of partnership income and $25K of GP.  the result each reports $50K of income. the same result if the GPs were treated as distributions which are non- taxable in this situation - each partner reports $50K of partnership income. 

[danielle-51]

I thought all distributions to non-passive partners were subject to self-employment tax. So what would the difference be in a distribution and a guaranteed payment if both are subject to self-employment tax? It seems harder to know how much to distribute when you don't know what the profit is going to be. Thank you for all of the information. It is helpful.

[BrittanyS]

The safest option to avoid receiving an underpayment penalty is for each partner to pay 100% of the previous year's taxes in Estimated Tax Payments.  

Partnerships typically pay either through profit sharing or guaranteed payments and report the earnings on a K-1 at the end of the year.  

The partnership agreement should be used to specify each partner's share of profits or losses in the business.  Taxes are paid on the partner's 1040 Individual Income Tax Return for the partner's share of profits.  All partners must agree on the profit-sharing percentages.

Guaranteed payments are expenses to the business but are not considered W-2 income, so income tax withholdings can not be withheld from the payments. At the end of the year, any remaining profits would be split based on the percentage outlined in the partnership agreement, and the guaranteed and remaining profit payments would be reported on the K-1.

For more information on what to pay in estimated tax payments, see the link below:

Estimated Tax Payments