Today TaxMama® hears from Ben in the TaxQuips Forum, with a question that raises another common issue. Let me summarize the issue. “Quite often when two people become partners, one of them ends up doing more work for the business than the other. How can you split the partnership income so each person still gets their fair share, when the profit split is 50/50?”
Rita Lewis, EA in the CT/NY area provides a simple solution.
Read about Guaranteed Payments to a partner (it’s the partnership version of a “salary”) in IRS Publication 541. That may be what you’re looking for to compensate the partner that is more active in the partnership.
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The guaranteed payments will reduce the partnership’s profits, so you can still split the net income 50/50.
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Both the guaranteed payment and profit split will get reported on your partner’s K-1. He’ll report more income overall, including higher self-employment income.
General Partners are not required to have withholding, as you would for wages to an employee. So all the income tax and self-employment taxes will be reported on his Form 1040 Schedule SE.
Although, the partnership is welcome to take withholding and submit the payments to the IRS on behalf of the partners.
Do not issue a 1099-MISC for the guaranteed payment. A partner (even a member of an LLC filing as a partnership) gets a Form K-1 to report all types of income and deductions.
Of course, you can change your profit percentage each year, if you like. But that gets much more complicated. Rita’s solution is the most logical approach.
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