my partners and I, in addition to co-owning an LLC, have been hiring ourselves to work FOR the LLC for the last 6 months. We run online classes and have been paying ourselves as instructors, however, at various amounts, depending on availability.
We are wondering if we should issue 1099s to ourselves in addition to filing schedule k-1s. And if we can't issue ourselves 1099s, how the different amounts we've been paying each partner, would impact how much we own the company.
Hi! I am a TurboTax Live CPA. If you are electing to be taxed as a partnership you won't need to file a 1099-NEC for any partners that completed work on a contractual basis. However, if you elect to be taxed as an S-Corp you would need to file 1099's/W-2's since there is an associated self-employment tax that you would need to pay on services rendered to the entity.
Turning to a new direction it feels as if you are approaching IRC section 707(c) guaranteed payment issues, which might be a favorable consideration since traditional capital distributions might have the effect of reducing ownership. The partnership agreement as discussed at an annual meeting would be the time and place for the partners to agree whether or not such payment are a reduction of capital or guaranteed payment. Long story short-guaranteed payments do not affect capital accounts.
no 1099's. no w-2's unless an S-Corp. then W-2's are required along with the filing of payroll tax returns,etc.
if not an S-Corp
the issue for the members to decide is whether these payments get treated as guaranteed payments or draw/distributions.
in the simplest terms, guaranteed payments are a partnership deduction that reduces the residual income that is allocated to the members (but not the total income). distributions have no effect on taxable income only on basis and at-risk isuues.
simple example 2 members sharing net profits 50/50 after guaranteed payments. $100 of net income before a guaranteed payment to one member of $30. so one member has taxable income of ($100-$30)/2 = $ 35. the other has $35 +$30 or $65