Reasonableness Of Guaranteed Payments
Reasonable compensation for partners and the related payroll taxes is a "hot topic" with Congress and the IRS. Because Partner's guaranteed payments are subject to FICA taxes, it is possible that Congress will try to pass legislation to force limited partners to pay more in "payroll" taxes. The IRS may try to assert that all business partnership income is taxable for self-employment taxes. Making guaranteed payments of a reasonable amount may help beat the IRS's contention. The rules on whether limited partners are subject to self-employment taxes on partnership profits (the amount of income left after guaranteed payments) are in a state of flux. The current IRS thinking is that if the limited partner performs services for the partnership for more than 500 hours per year, or is liable for partnership debts, or has authority to contract on behalf of the partnership, they are subject to self-employment taxes. Please let us know if this could apply to any of your partners and you would like some additional information regarding this issue.