LLC partnerships and taxes on gains

5 Replies

Hello BP, I have a question about LLC partnerships and tax ramifications. I want to create an LLC to hold title to a house we have under contract. We intend to flip the house. My husband and I both have w2 jobs and so, we should avoid being taxed for self employment on any gains. But we are partnering with my brother and wife on the project. My brother doesn't work but his wife does. I understand that if you set up an LLC and one partner is considered a dealer "self employed", then the entire LLC has to be taxed as self employed. Is this correct? Will this be avoided if both my brother and his wife are included in the llc since she has a w2 job?

The llc doesn’t change any taxes. Having a W2 job does Not eliminate self employment taxes being due, unless you guys are already over the income/contribution cap. A couple hundred bucks with a cpa will be worthwhile.

Thanks, talking to my CAP tomorrow...

@Dolores Gonzalez
Creating a partnership will require you and your fellow members to prepare a partnership return(form 1065).

The partnership will provide each member with a "Form K-1" that will then reported on each member's respective individual tax return.

If the intent of the partnership is to "Flip" the property. Each active partner will be allocated income(based on partnership agreement) and the income will also be subject to self employment tax.

Self-employment tax is 15.3(1/2 paid by the employer, 1/2 paid by the employee where 6.2% is for social security and 1.45 is for medicare).

in 2017; the social security wage base was $127,200. If you were employed and paid W-2 wages in excess of $127,200; you may be able to avoid paying the employees portion of social security.

There is an opportunity to save on self-employment taxes with the set up of an entity taxed as an S-corp.

depending on the partnership agreement any limited partners or non llc member managers may not have se tax.  The managers or non limited partners are going to have as tax.  It will be taxed at ordinary rates for everyone.  Flipping is generally an ordinary income activity.  

@Dolores Gonzalez

Each partner's exposure to SE tax is determined separately. It depends on degree of participation. Partners that are "running" the business have to pay SE tax. Partners that are passive usually don't have to. W2s have nothing to do with it; they only affect how much of the SE tax is due - for those partners who are subject to it.

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