A guaranteed payment is a payment made by a partnership to a partner for services or for the use of capital. The partnership makes these payments without regard to the profitability of the partnership.
Under Treas. Reg. § 1.707-1(c), payments made by a partnership to a partner for services or for the use of capital are considered as made to a person who is not a partner, to the extent such payments are determined without regard to the income of the partnership.1
The Treasury Regulations provide the following example to illustrate guaranteed payment made to a partner for the partner’s services:
“Example 1. Under the ABC partnership agreement, partner A is entitled to a fixed annual payment of $10,000 for services, without regard to the income of the partnership. His distributive share is 10 percent. After deducting the guaranteed payment, the partnership has $50,000 ordinary income. A must include $15,000 as ordinary income for his taxable year within or with which the partnership taxable year ends ($10,000 guaranteed payment plus $5,000 distributive share).”
Example of Guaranteed Payments & Health Insurance
Company A LLC, a Florida limited liability company (LLC), has four equal members and is taxable as a partnership for federal tax purposes. Three of the LLC members are passive investors and do not actively participate in the business operations. The fourth member, John Doe, is a 25% owner of the LLC and actively participates in running the business.
Under the LLC operating agreement, the LLC shall pay John Doe a salary of $5,000 per month for his services ($60,000 per year). In addition, the LLC will pay for John’s health insurance premiums of $500 per month ($6,000 per year).
The LLC reports both amounts as guaranteed payments for federal tax purposes on John’s Schedule K-1 (Form 1065), Line 4a (Guaranteed Payments for Services). The total amount reported on Line 4a is $66,000 ($60,000 compensation plus $6,000 for health insurance premiums).
Other Information
Taxpayers can find more information on guaranteed payments and other partnership tax issues in IRS Publication 541 (Partnerships) and in the Form 1065 instructions.