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Partner Guaranteed Payments

PARTNER GUARANTEED PAYMENTS: IRC SECTION #707(c)

Guaranteed payments are those payments made to a GENERAL partner for services rendered or for the use of capital that are determined without regard to the partnership's income.

Partnership's Tax Treatment:

1-Deducted as an ordinary business expense on Form 1065, Page #1, Line #10.

2-Reported on Form 1065, Page #4, Schedule K, Lines #4a and or #4b and #4c.

3-Reported on recipient partner's Schedule K-1, Box #4a and or #4b, and #4c.

4-Not subject to any payroll withholding taxes.

5-Partnership does not issue either a W-2 or 1099 Misc Income tax form to the recipient partner.

Partner's Tax Treatment:

1-General partners are neither an employee or independent contractor of their partnership (see 5 above).

2-Guaranteed payments are deemed taxable ordinary income subkect to self-employment taxes.

3-Reported on Schedule E, Page #2, Form #1040 AND Schedule SE Self-Employment Tax.

4-Partner will need to consider making quarterly estimated income tax payments to the IRS to avoid a potential large tax bill and IRS penalties and interest charges that may result.

Guaranteed Payments Resulting In A Partnership Net Loss:

If guaranteed payments result in a partnership net loss in which the partner shares, the partner must report the full amount of guaranteed payments as described above. 

The partner separately takes into account his/her allocable distributive share of the partnership net loss and deducts the loss to the extent that the partner has sufficient outside basis and at-risk amounts available.

Health Insurance Premiums:

Health insurance premiums paid by a partnership on behalf of a partner, for services rendered as a partner, are treated as guaranteed payments.

A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an above the line deduction (as an adjustment to income) the same as a self-employed person is allowed. (Self-Employed Health Insurance Deduction).

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