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Old 06-05-2017, 01:38 PM
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W2 or Owner's Draw

How would a partnership make the transition from paying their two owners bi-weekly payroll and issuing them a W2, to pulling an owner's draw?

I have an LLC where the partners would run payroll for themselves bi-weekly not knowing that they are entitled to an owner's draw. So on the first day of Q2, they switched to taking a draw. I setup a draw account in our accounting software and am tracking the distributions, but my main concern is the estimated quarterly taxes. We are not withholding anything from the distributions, whereas we were in their bi-weekly paychecks; and since this started mid-year I am not sure if we should be making estimated quarterly payments to the IRS and state, or if I should just wait until we file 2017 taxes and then proceed.



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Old 06-06-2017, 07:53 AM
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w would a partnership make the transition from paying their two owners bi-weekly payroll and issuing them a W2, to pulling an owner's draw?
=====>>A LLC can deduct its employees' wages as a business expense, reducing the company's taxable profit. If your LLC has elected to be taxed as a partnership, the LLC cannot pay wages to the members and the members cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the LLC. The owners of the LLC, however, aren't employees of the business and therefore can't be paid wages sometimes called "W-2 income" after the federal form that reports such pay. The exception is when the LLC chooses to be treated as a C- or an S corp for tax purposes. For MMLLC that hasn't requested to be treated as a corp, the tax rules for the MMLLC apply. Owners of a MMLLC are not employees and cannot receive W-2 income. Instead, all the company's profits are taxed as personal income to the partners thru Sch K1s of 1065 and on 1040s; each partner is allocated a share of the profits based on his ownership interest in the company. All partners must pay income taxes on their share of the profit; those who actively work for the company must treat their share of the profit as self-employment income.


I have an LLC where the partners would run payroll for themselves bi-weekly not knowing that they are entitled to an owner's draw. So on the first day of Q2, they switched to taking a draw. I setup a draw account in our accounting software and am tracking the distributions, but my main concern is the estimated quarterly taxes.======>> LLC members are not 'employees' for payroll and payroll tax purposes. And I know right where you're coming from--it'd be much easier if your 'salaries' could be run through the payroll service.

Instead, the members will take draws from the LLC, and will make personal quarterly tax estimate payments. Remember that a member's taxable income (and hence the amount of tax estimate payments the member must make) will be based on the member's share of the LLC's net profits, and NOT based on the amount of draws the member takes out. If you and I are 50 / 50 partners in an LLC, and that LLC had $300 in net taxable profit, then you and I each pay tax on $150, whether we took draws, didn't take draws, or took out unequal amounts. A guaranteed payment can be for different purposes. The one you are talking about is for a partner's salary. A salary is usually arranged when one or more partners are active in the business and others aren't.The LLC/partnership takes a tax deduction for the guaranteed payment and the member/partner who receives it reports it as income. The amount is reported by the LLC/partnership to the member/partner at Part III, line 4 of Schedule K-1.
The members/partners share taxable income of the LLC/partnership, after the guaranteed payment deduction, is taxable on their individual income tax returns. The amount for each member/partner is shown at Part III, line 1 of Sch K-1.


We are not withholding anything from the distributions, whereas we were in their bi-weekly paychecks; and since this started mid-year I am not sure if we should be making estimated quarterly payments to the IRS and state, or if I should just wait until we file 2017 taxes and then proceed.=>as mentioned above;you should be making estimated quarterly payments to the IRS and state for mid year



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