Question

One of your clients is a dermatologist who is on the staff of a local hospital and also a partner in a medical partnership. He receives a K-1 at the end of the year that lists him as a limited partner and includes amounts identified as Guaranteed Payments. You client explains that the amount listed as Guaranteed Payments is his share of the partnership income and does not represent payment for services provided to or on behalf of the partnership. He contends that they should be reported as passive income and therefore not subject to Self-Employment tax.

Accounting Income Taxes

Answer 1

Partner Taxable Income: Guaranteed payments are also included on Schedule K-1, line 4, as ordinary income to the partner (they may also be included as part of net earnings from self-employment on line 14a). Guaranteed payments for services are not included in qualified business income for purposes of the Section 199A deduction for flow-through business entities.

All partners that are actively participating in a partnership are generally subject to self-employment taxes on their share of ordinary income from the partnership. In addition, they are also subject to self-employment taxes on their share of guaranteed payments. Ordinary business income or loss is reported on Line 1 of each partner’s Schedule K-1, while guaranteed payments are reported on Line 4 of the Schedule K-1.

According to IRC Section 707(c), guaranteed payments to partners are determined without regard to the income of the partnership. Payments to a partner for services or the use of capital should be considered just like it is made to one who is not a member of the partnership. The partnership agreement must outline whether and when the partners are to receive guaranteed payments and how those respective amounts are calculated.