Kirk, a partner in KC Studio, receives a $53,000 guaranteed payment from the par
ID: 2589874 • Letter: K
Question
Kirk, a partner in KC Studio, receives a $53,000 guaranteed payment from the partnership. Which of the following is a tax consequence of receiving this payment?
A. Kirk is not taxed on the payment as it is already included in his proportionate share of the partnership ordinary income.
B. Kirk is taxed on the guaranteed payment plus his proportionate share of the partnership income, both of which are subject to self-employment taxes.
C. Kirk is taxed on the guaranteed payment plus his proportionate share of the partnership income; but only the partnership income is subject to self-employment taxes.
D. Kirk is taxed only on the guaranteed payment, which is subject to self-employment taxes.
A. Kirk is not taxed on the payment as it is already included in his proportionate share of the partnership ordinary income.
B. Kirk is taxed on the guaranteed payment plus his proportionate share of the partnership income, both of which are subject to self-employment taxes.
C. Kirk is taxed on the guaranteed payment plus his proportionate share of the partnership income; but only the partnership income is subject to self-employment taxes.
D. Kirk is taxed only on the guaranteed payment, which is subject to self-employment taxes.
Explanation / Answer
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding.
The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income.
B. Kirk is taxed on the guaranteed payment plus his proportionate share of the partnership income, both of which are subject to self-employment taxes.
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