Tax Law Blog
Business owners who operate through partnerships or LLCs taxed as partnerships should take note: a recent Fifth Circuit Court of Appeals decision could significantly reduce the amount of self-employment tax certain partners owe.
Under long-standing tax law, partners generally pay self-employment (SECA) tax—currently 15.3%—on their share of business income. However, there is an important exception: the distributive share of income earned by a “limited partner” is typically not subject to SECA tax (although payments for services, called “guaranteed ...
For owners of closely held businesses, compensation planning is more than just a business decision—it’s a tax strategy that can invite IRS scrutiny and the recharacterization of compensation if not handled carefully.
Why Compensation Matters
The tax rules allow businesses to deduct “reasonable” compensation paid to employees, including owner-employees. But when compensation is considered too high, the IRS can reclassify the excess as a dividend. This creates a mixed result: the individual may benefit from lower dividend tax rates, but the company loses a valuable ...
