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jason.miller.1968
08-30-2012, 11:23 AM
I am a trader and annual profit is between $150K to $500K.

I talked to an EA and was told about a legal scheme for Husband wife partnership to pay ZERO SE self-employment tax:

Step 1: I am the only active/general member and doing everything while my wife has her full-time job (Paid $80K) and does nothing for this partnership.
Step 2: Move $100K from her checking and $1K from my checking to the partnership business checking account
Step 3: In Operating agreement clearly stated that my wife is limited partnership with 99% profit based on capital contribution above
STep 4: Pay myself a minimum guaranteed payment (as salary) because there is no 'reasonable salary' requirement for partnership (not like in S-corp)

Then, since my wife is a limited partner, she does not need to pay SE tax on her distributions. And I pay only nominal SE tax too due to the minimum guaranteed payment and 1% profit distributions.

Too good to be true?

MyITGuy
08-30-2012, 12:02 PM
I am a trader and annual profit is between $150K to $500K.

I talked to an EA and was told about a legal scheme for Husband wife partnership to pay ZERO SE self-employment tax:

I am the only active/general member and doing everything while my wife has her full-time job (Paid $80K) and does nothing for this partnership.
Move $100K from her checking and $1K from my checking to the partnership business checking account
In Operating agreement clearly stated that my wife is limited partnership with 99% profit based on capital contribution above
Pay myself a minimum guaranteed payment (as salary)

Then, since my wife is a limited partnership, she does not need to pay SE tax. And I pay only nominal SE tax too due to the minimum guaranteed payment and 1% profit.

Too good to be true?

I can't speak to your specifics, but my understanding is:
You need to pay yourself a reasonable salary, which is subject to SE and other federal/state taxes (I.E. Too good to be true to pay ZERO SE Tax)
You can take a distribution of profits, which is not subject to SE taxes

With this being the case, why complicate things by amending your operating agreements and investments in order to get your wife involved who is not active in the company anyhow?

jason.miller.1968
08-30-2012, 12:14 PM
thank you very much for your reply.

A few comments to your reply:

1. As a partnership, to my understanding, there is no 'reasonable salary' thing any more as in S-corp

2. With a profit 150K-500K, even with a reasonable salary for a typical trader 80K, still a big savings because more than half of profit now goes to distribution and 99% of distributions has no SE tax.

3. Without wife, ALL income (guaranteed payment/salary and distributions) are subject to SE tax for general active partner. It is partnership, NOT s-corp.


I can't speak to your specifics, but my understanding is:
You need to pay yourself a reasonable salary, which is subject to SE and other federal/state taxes (I.E. Too good to be true to pay ZERO SE Tax)
You can take a distribution of profits, which is not subject to SE taxes

With this being the case, why complicate things by amending your operating agreements and investments in order to get your wife involved who is not active in the company anyhow?

Business Attorney
08-30-2012, 09:32 PM
Technically, all of your statements are correct. Partners don't get salaries; they get allocations of income and they get distributions. The allocations to limited partners who do not participate in the business of the partnership are generally not treated as self-employment income.

BUT - the IRS has many ways to attack such a scheme. First of all, they might simply argue that the "assignment of income doctrine" allows them to ignore your structure. The assignment of income doctrine is a judicial doctrine developed by courts trying to limit tax evasion.

Or, they might argue that the allocation does not have "substantial economic effect" in which case the IRS would reallocate the income in accordance with the interests of the partners in the partnership. Since the $100 capital is not a material factor in the income (but your efforts as a trader are), the IRS could argue that the real interest of the partners is not what you wrote in the partnership agreement but based on your earnings.

The IRS has other weapons in its arsenal, too. So while it appears to be a way to avoid SE taxes, I would not count on it.

jason.miller.1968
08-30-2012, 10:17 PM
Wow! What a reply! I am convinced that you are correct and this scheme is too risky. Thank you very much for your help!


Technically, all of your statements are correct. Partners don't get salaries; they get allocations of income and they get distributions. The allocations to limited partners who do not participate in the business of the partnership are generally not treated as self-employment income.

BUT - the IRS has many ways to attack such a scheme. First of all, they might simply argue that the "assignment of income doctrine" allows them to ignore your structure. The assignment of income doctrine is a judicial doctrine developed by courts trying to limit tax evasion.

Or, they might argue that the allocation does not have "substantial economic effect" in which case the IRS would reallocate the income in accordance with the interests of the partners in the partnership. Since the $100 capital is not a material factor in the income (but your efforts as a trader are), the IRS could argue that the real interest of the partners is not what you wrote in the partnership agreement but based on your earnings.

The IRS has other weapons in its arsenal, too. So while it appears to be a way to avoid SE taxes, I would not count on it.

Evan
08-31-2012, 03:37 PM
Remember, pigs get fattened but the hogs get slaughtered.

jason.miller.1968
09-01-2012, 04:45 AM
ha, well said. thank you!


Remember, pigs get fattened but the hogs get slaughtered.

gregfallon1
01-13-2013, 03:19 AM
"I am a trader" Why are you paying self-employment taxes? I assume you are a day trader and not a trader dealer Code Sec. 1402(a)(2) .