Is it always subject to SE tax?

[BHoffman]

My client is employed by an LLC. She also receives a Partnership K-1 for her 1.51% share of profits, losses, and capital from the same company. This is a real estate title company and she is a salesperson. It is privately owned and not a PTP.

For the first time, the K-1 is listing an amount in box 14, Code A indicating the amount is subject to SE tax. In Section G, the box "Limited partner or other LLC member" is checked.

I'm looking at Renkemeyer, Campbell, and Weaver LLP (136 TC 137, 2011) and wondering if all people who are employed by a company and also receive a K-1 will have the income subject to SE tax? Is the K-1 incorrect, or is there any other way to look at this or argument against it being subject to SE tax?

[Terry D EA]

Is this partnership taxed as a disregarded entity and only a SMLLC? Is it possible the income on the K-1 is a guaranteed payment? As stated below, partners in a partnership are not employees but are considered to be self-employed. Does your client receive a W-2 from this company they are a partner in? If so, that is done incorrectly and should cease.The blurb below is from the IRS website. 

Partners in a partnership (including members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership.

• If you are a general partner of a partnership (or treated as a general partner in an LLC) that carries on a trade or business, your net earnings from self-employment include your distributive share of the income or loss from that trade or business. General partners must also include guaranteed payments for services rendered to, or on behalf of, the partnership as net earnings from self-employment.
• If you are a limited partner of a partnership (or treated as a limited partner in an LLC) that carries on a trade or business, only guaranteed payments for services you rendered to, or on behalf of, the partnership are net earnings from self-employment. Limited partners do not pay self-employment tax on their distributive share of partnership income, but do pay self-employment tax on guaranteed payments.

[jklcpa]

In a general sense, other than guaranteed payments that would represent compensation for her services as a salesperson, income flowing through to a limited partner is usually considered passive income unless the person crosses over into a role of actively engaging in the business or management functions. 

[BHoffman]

Terry - this is an investment MMLLC.  The client is employed by the company, but invested a long time ago.  This is the first K-1 with the earnings listed as SE earnings.  No guaranteed payments.  She gets a W-2.  

The SE income is about $26,000, and her W-2 wages are about $100k.  The difference is tax is around $2k higher if SE tax is imposed.

[BHoffman]

10 minutes ago, jklcpa said:

In a general sense, other than guaranteed payments that would represent compensation for her services as a salesperson, income flowing through to a limited partner is usually considered passive income unless the person crosses over into a role of actively engaging in the business or management functions. 

That court case seems to have people believing that if a limited partner is also an employee, then that fact alone means she is actively engaging.  I just don't think that always applies at all.  The case was a law firm and the partners were certainly actively engaging in the business operations, and they had control.

My client is limited to her job in Sales.  She isn't able to make any management decisions.

[Terry D EA]

Well by your descriptions it certainly seems she would be actively engaged if she is working in sales for the company she is a partner in. So, you are saying she is a "limited" partner correct? If so, then the statement above from the IRS would indicate that her share of distributive income is not SE income and only payments that are guaranteed payments are subject to SE tax. This would make me believe the K-1 may have been prepared incorrectly.

[BHoffman]

Me too.  I sent her an email asking about it that she will forward to the K-1 issuer.  I can't think that this is anywhere close to the Renkemeyer case.  That was a very blatant abuse.  

My client didn't even want to invest in this partnership arrangement but was told by her bosses that she had to. 

If the issuer refuses to correct the K-1, then it's either report it and pay the tax or form 8275 Disclosure statement.  I'm going to have fun finding the IRC support for that.  

 

 

[Randall]

You might also request a copy of the member agreement.  If she was told she had to invest and has no management decision input, there should be something in the member agreement.  It might help support your position if you go the 8275 route.

 

[BHoffman]

That is a great idea and I'll do it

[Max W]

The $26K might have been for some type of benefit such as health insurance, which should have been reported as a guaranteed payment and subject to SE.  The client should know.

[BHoffman]

The client has had this tiny partnership percentage for years with the company who employs her.  The prior year K1 forms have never shown any SE amount.  All of her benefits are included in her employee status.  Nothing is different from prior years except that the income is now shown to be subject to SE tax.

[Richcpaman]

B:

The partnership may have changed preparers, and instead of not reporting anything in Box 14 like they had in the past, the new ones put something in that box.  ATX also changed some things, and is now defaulting to putting something in box 14.

Your client gets a W-2 for her wages.  Correct? While some may state that is incorrect for a partner to get a W-2 from the entity, it actually works in many respects.  She should just have a guaranteed payments line for $100,000.

This 1.51% interest is her share of the profits after actual business expenses, and clearly part of the "limited" partnership interest. 

I would ask for a corrected K-1.  You may not get it, but you can ask.  Sometimes it alerts the Tax Prep firm that they screwed up.

File the 8275 if you want.  Support for it is that the treatment is inconsistent in THIS year by the firm.

Rich