LLC, Reasonable Salary, and Estimated Taxes

Paying guaranteed salaries is optional

Yes and No. Your only transactions can be a distribution of the profits, but that doesn't escape the members' obligation to pay estimated taxes on the profits as earned each tax quarter if you are using the 2210 AI Annualized Income Method to compute any underpayment, or 1/4 of 90% of current year taxes.

The need for paying Estimated Taxes is based on your prior year's tax, or 90% of your current years final actual tax, or annualizing actual income each quarter. If you are trying to avoid paying quarterly estimates, pay a guaranteed salary in December sufficient to Withhold enough to satisfy either the 100% (or 110%) of last year's tax or 90% of current year's tax, (or within $1,000 of it). Then no estimates would be required regardless of the amount of profit or when it occurred. ed

Generally, I agree with what you say Ed, but this quoted part has an error. Paying the guaranteed salary this way will not work. Remember, OP is a member of an LLC taxed as a partnership. As such, he cannot be treated as an employee

-- even for guaranteed payments, unless he is less that a 2% partner! Thus, there can be no withholding to avoid the underpayment penalties. This would work for an employee but not for a partner. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Lanny: Are not guaranteed payments to partners for their services to the partnership subject to SS tax and withholding as employees? ed

No, a partner (or LLC member) is a partner, not an employee. Partners cannot be treated as employees for withholding purposes. The guaranteed payments are still reported on the K-1, not a W-2. The guaranteed payments are deducted on a separate line on the 1065 and allocated to individual partners on K-1s. These payments do not show up anywhere on the 941s. Thus, there is no withholding! There is an exception to this rule but it doesn't apply to most partnerships. Only large national or international CPA and law firms can take advantage of the exception. If a partner's interest in a partnership is less than 2%, he/she can be treated as an employee and have taxes withheld from guaranteed payments. The partner is still liable for both income and SS tax but figures these on his personal return. As such, he is subject to making quarterly estimated tax payments. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Subject to tax, but not to withholding. Although I've seen quite a few LLCs whose members got W-2s. There's a lot of wrong treatment related to payroll tax stuff, regardless of entity. Phoebe :)