Determining comp in a partnership

[Bird]

I've probably either asked this or opined on it, but here goes (again)...

Partners in LLCs are commonly taking W-2 comp so they can have withholding handled through the company's payroll system and not have to make quarterly tax deposits. But then they also have profits (or losses) and I guess we have to net the two; it's just not quite as simple as adding draw and profits and then applying the SE tax deduction, I think we should do the SE deduction on the profits only, then reduce the profit further by the contribution to get compensation. And if there's a loss, then I suppose we subtract that from their paid salary, and reduce further for the contribution. But can you take a contribution deduction on a 1040 if you have a loss?

If they wind up with a loss then I think they will have overpaid on SE taxes; not my problem.

And of course some accountants are taking the salaried partners' plan deductions on the partnership return, which means we do NOT pull it out when determining comp since it's already reducing profits.

Any disagreement or comments?

[rcline46]

I try to take the following approach:

Form of entity - a true partnership, a sub-s, a c corp, an LLC taxed as partnership or sub-s or c corp, or a limited partnership - get that from the accountant - verify with tax form for entity.

many times true partnerships run 'draws' through the payroll system for tax purposes and then back it out at year end to compute the K-1. The K-1 then is correct and they do not actually get a W-2.

If they really get a K-1 and a W-2 from the entity it must be taxed as a sub s, and the K-1 only has passive income and is irrelevant.

If anything else, then have the accountant explain the laws and authority under which they are reporting income, and only use what the accountant reports to you and do not make your own determination. If necessary fire the client because you do not want to be a party if the IRS becomes involved.

[movedon]

Bird - I've run across unincorporated business owners getting W-2s a time or two (have no idea whether that should ever happen or not, but that's what the accountant did) and generally agree with your thoughts on it, although I do vaguely recall the definition of comp in a plan document (Relius proto or vs, maybe?) causing me problems. I think the document made me question whether it was appropriate to include the W-2 comp as plan comp for the self-employed person. I think I decided not to count the W-2. Sorry I can't be more specific.

Edit: added "Bird-" to clarify which of the above posts I was addressing.