Guaranteed payments for a husband and wife partnership LLC

gudst01gudst01 Member Posts: 4

I am unsure how to characterize guaranteed payments made to my husband. He works full time for the business, while I do not. So he has a set $ amount in guaranteed payments above our profit split. We’ve done the paperwork on that as part of our partnership agreement to be on the right side of the IRS.
But what is the right way to show his guaranteed payments in Wave? Is it an owner’s drawing that should be reflected as a balance sheet transaction. Or am I ok characterizing it as an expense by creating a vendor account for him and recording the payments against his “bills”?
Since a partnership is a pass through entity and we are married filing jointly, we pay taxes through our personal returns. So, I think we are accurately paying taxes either way.

Comments

  • PaulCPaulC Administrator Posts: 79 admin

    Hi @gudst01,
    Interesting question, and in many ways the answer is "either".
    It sounds like you have a good understanding of your tax position - and we can't comment on tax treatment in any case. So the question - then - is which treatment gives the most 'real' understanding of your business from a management accounting perspective?
    Here are 2 ways you might think about this:
    1. The business that you jointly own incurs the cost of your husband's services. If you paid someone else to do the work that he does, then that would certainly be an expense, deducted before you calculate your net profit. The fact that your husband does the work rather than a third party does not make the business itself inherently more profitable, so you should consider your husband's fixed remuneration an expense, and each draw your share of profits as a draw from owner's equity.
    2. Alternatively, you both work in a private business that makes a (higher) profit, and draw from partnership profits in unequal shares according to the partnership agreement. In this case your husband's labor is treated differently to what it would be if contributed by a third party.
    Which makes more sense to you? Is there something about the business that is an inherent source of profit? Might you in fact hire someone else to perform your husband's work, so that he and you both focus on working on the business, rather than in the business?
    At Wave, we are big believers in the idea that the true purpose of accounting is to understand and better manage your business, so whichever representation makes the most sense to you is 'right'. (Your CPA can always take your numbers and re-present them different ways for the government, if required.)
    The only other consideration I can think of is, what happens if one day your partnership business wants to seek some loan finance, or other investment? In this case, you could be better with a treatment that presents your business a more profitable, so you'd be better not treating your husband's remuneration as an expense, and simply drawing from owner's funds.
    Hope that helps you think through the choices a bit more. I'd be interested to know what you decide!

  • MikegMikeg Member Posts: 388 ✭✭✭

    Here is the tax side, guaranteed payments are treated as an expense. Similar to salaries and wages except no taxes are withheld or paid on behalf of the partner at the partnership level. When you create the K-1 for the partnership it will have the guaranteed payment there. Since this is a H&W partnership it has no effect on your overall liability (i.e whether the partnership paid a guaranteed payment or not) it will be the same no matter which way it is presented.

    Mike G, CPA
    www.mgfinancialservices.net
    Better Service - Better Pricing

    P.S. Would welcome the opportunity to be of service.

  • PaulCPaulC Administrator Posts: 79 admin

    Thanks for jumping in, @Mikeg!

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