We received a question at USTaxAid regarding multiple properties with multiple owners. One of the owners did more work and there was an LLC, taxed as a partnership in the mix. What’s the best way to sort it all out?
The LLC owners are called members. One of the members does more work than the others and they want to pay her. The questions resolve around whether that member should be paid as a property manager or as a guaranteed payment.
As far as the LLC is concerned, there is no tax difference. A property management fee is deductible. A guaranteed payment is also deductible. The LLC will report the total annual amount of property management fees paid to the working member on a Form 1099-MISC. If the LLC instead pays the member with a guaranteed payment (fancy term for a check that is written from a partnership or LLC taxed as a partnership to one of the members or partners), the LLC also gets a deduction. The guaranteed payment amount is reported on the Schedule K-1 that is prepared as part of the partnership return.
Either way, the LLC gets the deduction. There is a slight difference in how it is reported.
In the case of the working member, there are a couple of differences in how she’ll report the income. If it is shown on a Form 1099-MISC, she has a business. That means, she’ll need to report it on a Schedule C unless she forms a business structure. She can take a deduction for legitimate business deductions. She’ll also have to pay self-employment tax and income tax on the net income from the business.
If she instead receives a guaranteed payment, she’ll report the income and pay self-employment tax and income tax. There generally isn’t any allowance for deductions. So, the working member will end up paying more in taxes.