We are creating an new multi partner LLC for Flipping business(8 partners total, 2 partners will be active). We are looking at doing 2-3 Flips in first year. Is Flipping considered as active or passive like rental ? and do all the partners need to pay quaterly self employment tax for it ? I checked with several CPAs and getting conflicting answers. Most are saying we will have to pay Self-employment tax which couple of them are saying we don't have to. If you can share your thoughts that would be great.
Hopefully a CPA will weigh in here (@Linda Weygant ?) but here is how I think it will go... Flipping is "active" income but that income will pass through the LLC partnership to you and the others in the form of a K-1. That document will be added to your taxes when you file and that income will be factored in. However, you (not the partnership) are responsible for making tax contributions during the quarters that income is received. You don't have to be exact - but you need to either pay 110% of what is owed OR 100% of what was owed last year... So you will be filling out form 1040 ES and your state equivalent.
You've got it correct, @Teri S. In general, the active members will be subject to Self Employment tax as well as ordinary income tax and they should pay estimated taxes to cover this if they have no coverage elsewhere.
For the "silent" partners, this will still be considered ordinary income for them, but they *may* be able to avoid Self Employment Taxes. They should consult with their *own* CPAs (not rely on theoretical discussions from people who do not know their individual situations).
Taxes are not cookie-cutter, one-size-fits-all issues and the silent partners may have many facts and circumstances going on that may indicate that they do or do not owe self employment tax.
It will also depend on how the partnership tax return is completed. Guaranteed payments vs profit sharing may have different taxation structures for each partner.
Thanks Teri/Linda - Good information from both of you ! We are thinking of treating our LLC as S Corp for tax purpose and run payroll for 2 active members so other silent members won't have to pay self employment tax every quarter. At the end of the year all members will pay tax as per K1. Not sure if there is a minimum % or $ amount of each payroll we must have for this structure ? Please advise.
@Oshi Jain In regards to the owners of and S-Corp Salary, this is one of those grey areas of the tax code. IRS basically says a "reasonable salary" of course most want to pay as low a salary as possible to avoid additional payroll taxes while not running afoul of IRS. If I were you I would figure out the responsibilities of the partners and the time they will devote to the business and then search for similar job offerings in your area and use that as a guideline, for example full time project superintendents in your area make between $35-$40 print out job listings and put in a file, and pay accordingly to the the time they plan to devote to the business. You can adjust for experience, fringe benefits, ease of schedule ect. but document how you came up with salary An employment contract would also be helpful but not necessary. As long as your reasonable IRS wont question it. This provision is really for the Doctors and Lawyers out there who try to get away with paying an 18,000 year salary to themselves while their practice is pulling in 250K a year.
Hope this Helps,
S-corps actually do not have a distinction of active/passive shareholders.
The great thing about S-corps is that none of the income reported on line 1 of the K-1 is subject to self-employment tax.
This is why a Partnership K-1 will have a line for income subject to self-employment tax while an S-corp wont have that line.
With that said - An S-corp is required to pay for self-employment tax by paying a fair salary to those who did work for the S-corp.