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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
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Experience:  Owner of a CPA firm
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I have a stand-alone trust that owns 50% in an LLC partnership

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I have a stand-alone trust that owns 50% in an LLC partnership membership in Texas. My 50% partner also has his membership in a stand-alone trust, too. So in essence 2 separate trusts own 100% of an LLC that operates as a partnership. (My partner and I just transferred our membership interests into separate trusts at the beginning of 2010; prior to that we co-owned the partnership in our personal names and took "draws" occasionally as distributions.) Now here's my question: Can my partner and I take payroll salaries now (instead of "draws') without having to declare that as distributions (since Trusts own the LLC and not us personally). We are thinking our trusts would take a year-end distribution after the year closes, but in the meantime we would put ourselves personally on as salaried employees. Is this permissible?
Submitted: 4 years ago.
Category: Tax
Expert:  BK-CPA replied 4 years ago.

If you are working for the partnership as employees, you probably should be taking a salary regardless (unemployment taxes). This is all about self-employment tax to the IRS primarily, which you'd pay the equivalent of in employment taxes anyways, so it doesn't matter. If someone told you that you would have to pay self-employment taxes on top of payroll taxes, they are mistaken.

 

There are different kinds of trusts, but in determining whether or not you are an owner, related party rules will most certainly ensure that in your case you are still an owner. In other words, you didn't change your tax status for the most part by putting your interest in a trust. You must (or your accountant / lawyer etc.) have put the interest in trust for different reasons, which is common.

 

You probably won't even have the income flow through the trust until later years after someone dies, divorces, etc., meaning you'll report for income taxes the same way as you always have for now, even though the trust is the technical owner of your interest, if it's what kind of trust I think it is.

 

Say your share of a partnership's taxable income is $50K, trust or no trust. You can generally receive a K-1 for $0.00 and a $50K W2 should you choose to use wages, or you can receive no W2 and $50K as self-employment income in your K-1. You've always been able to do this, trust or no trust, and the amounts should be based on what a reasonable salary is for your work (ie - What would you have to pay someone else to do your job for your partnership?).

Customer: replied 4 years ago.

Thank you for your reply. We put our ownership into the 2 trusts for privacy and estate planning reasons and not tax reasons.

 

This LLC was formed in 2007 and for Y07, Y08, and Y09. Very small company -- basically we are consultants that call in contractors occasionally. During the first 3 years, we took draws (distributions) every so often and paid our contractors and issued 1099s.

 

Now the face of the business is changing and it is growing. We'd like to put ourselves on small monthly payroll salaries, and maybe a couple of part-timers. So could we as partners take small salaries (issued ourselves W-2s at year-end along with part-timers) PLUS give us (as partners) a year-end dividend in the form of a distribution to our respective Trusts. So say salaries would be $25k each (on W-2) and year-end distribution to our trusts would be $10k each? It is my understanding (from attorney who set-up trusts) that Trusts have to file their own IRS returns and we must use our personal SSNs. Does that seem right? So in essence, withholding taxes would come from our W-2 salaries and self-employment tax on $10k would kick-in from our Trusts? Does that seem right?

Expert:  BK-CPA replied 4 years ago.

Yes, you make take both salary and distributions as owners, via a trust or otherwise.

 

To cover the tax on the income that gets assigned to the trust, you can pay estimated tax payments (whether the trust takes a distribution or not, income from a partnership gets recognized when earned according to the partnership's accounting method and not when cash or property itself gets distributed).

 

I would suggest covering your entire personal tax liability (which may/probably includes the trust's share) using your wage withholding. This is because federal withholding is considered as paid evenly throughout the year, even if the bulk is withheld in December, assuming you weren't rigging your payroll to deter tax payments generally speaking.

 

Some kinds of trusts have to file tax returns, some don't at all. I would assume yours wouldn't, but as I said, I have no idea at this point. Your professional would obviously know for your case.

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 793
Experience: Owner of a CPA firm
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