Thursday, March 11, 2010


Recently I spent a lot of unnecessary research time before I received the K-1 from an LLP partner.  I had assumed that it was an LLC which opened the door to possibly reducing the impact of self-employment tax.  If you are an employee the most you pay is 7.65% of your salary, but the employer pays the matching half, so the total could be 15.3% altogether.
If you are self-employed or a partner you pay both halves--social security of 12.4% up to the maximum amount taxed and medicare of 2.9% on 100% even if you are above the SS max.

If my client had been an LLC member, the self-employment tax might have been limited to an equivalent of a reasonable salary.  My client's salary the year before had been about $35,000 less than his partnership share of profits, so that might have saved a little.  It could also have been contended that a "reasonable" salary could have been less than the previous salary.

Unfortunately the K-1 was for an LLP (Limited Liability PARTNERSHIP) and the K-1 clearly stated that it was all subject to self-employment tax.  The only redeeming feature was that "unreimbursed partnership expense" was fully deductible--for income tax, but not for self-employment tax).  As an employee, an employee's unreimbursed business expense is only deductible to the extent that it exceeds 2% of Adjusted Gross Income.

1 comment:

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