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SE tax on LLC distributable income and guaranteed payments.

Article Excerpt
The self-employment (SE) tax rules oil distributable limited liability company (LLC) trade or business income and guaranteed payments are an everyday issue in tax practice, but there is little guidance on determining the income subject to SE tax.

The SE tax rate is 15.3%, of which 12.4% is Old Age, Survivors, and Disability Insurance (OASDI), and 2.9% is Medicare tax. The OASDI portion is subject to an $87,900 limit for 2004. The Medicare tax is not subject to an income limit and, thus, is paid on all SE net earnings. One-half of the SE tax can be deducted in arriving at adjusted gross income. Another deduction is allowed through the SE tax computation itself; SE income is reduced by 7.65% before calculating the tax.

Determining SE Taxable Income

Sec. 1402(a) defines "net earnings from SE" to include an individual's distributive share (whether or not distributed) of income or loss from any trade or business carried on by a partnership in which he or she is a member. A partner's share of partnership dividends, interest and certain gains and losses are excluded by Sec. 1402(a)(2), even though they arise from the operation...

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