I have a question about LLC Partnerships, how they pay their members and the tax implications involved. My wife and her sister have a LLC partnership together, 50/50. They have paid themselves through small guaranteed payments and up until this year have not made a profit, so the taxation made sense--it was just on the amount of the guaranteed payments.
However this year, the LLC turned a small profit, This was indicated on the K-1 my wife received, and as a pass-through entity filing jointly, we will be paying tax on this, not only income tax, but also self-employment tax. Here is where my question comes in. My wife hasn't actually been PAID any of this money (except for the guaranteed payments). The profits of the company are just sitting in the LLCs bank account. So we're paying several thousands of dollars of taxes for money she hasn't gotten paid. And I'm confused about how this money is supposed to come to her.
If the LLC were to pay it to her is business year 2015, the money would be taxed AGAIN as income and self-employment tax, meaning it would have been double-taxed, which makes no sense to me. As a pass-through entity, isn't 50% of the LLC's profit automatically my wife's, and they should basically have some sort of a distribution where half of the profits go to my wife and half go to her sister? I'm a little confused about how retained earnings work in this situation seeing as we are paying self-employment taxes on this money. How does the LLC "retain" earnings on money that my wife has already paid self-employment tax on? At this point, isn't that money basically hers? Or, is there some additional taxation hit that has to occur now to get at the money because they screwed up and didn't zero out the books at the end of the year (in which case I am going to be pretty POed at their accountant).
Apologies for not really understanding this stuff. Thanks for any info you can give me.
However this year, the LLC turned a small profit, This was indicated on the K-1 my wife received, and as a pass-through entity filing jointly, we will be paying tax on this, not only income tax, but also self-employment tax. Here is where my question comes in. My wife hasn't actually been PAID any of this money (except for the guaranteed payments). The profits of the company are just sitting in the LLCs bank account. So we're paying several thousands of dollars of taxes for money she hasn't gotten paid. And I'm confused about how this money is supposed to come to her.
If the LLC were to pay it to her is business year 2015, the money would be taxed AGAIN as income and self-employment tax, meaning it would have been double-taxed, which makes no sense to me. As a pass-through entity, isn't 50% of the LLC's profit automatically my wife's, and they should basically have some sort of a distribution where half of the profits go to my wife and half go to her sister? I'm a little confused about how retained earnings work in this situation seeing as we are paying self-employment taxes on this money. How does the LLC "retain" earnings on money that my wife has already paid self-employment tax on? At this point, isn't that money basically hers? Or, is there some additional taxation hit that has to occur now to get at the money because they screwed up and didn't zero out the books at the end of the year (in which case I am going to be pretty POed at their accountant).
Apologies for not really understanding this stuff. Thanks for any info you can give me.