Question about Texas Limited Liability Companies

[JFeems7560]

Good Evening - My question is to those businesses that are Texas Limited Liability Companies and have chosen to elect to be either a Partnership or Sole Proprietor for Federal Tax Purposes. Our L.L.C files a Form 1065. We were audited by Texas Workforce Commission for the year 2009. Field Auditor came back with adjustments to the Gross Wages and Taxable Wages (only up to $9,000 per person per year) for the distributions taken by one of our Partner/members. The 2nd Partner did not take any draws in 2009. Referring to Section 1.5.3 of the T.W.C. Law Manual, the auditor insists that because our Original Articles of Organization did not have a "formula" addressing how distributions to partners are to be made, therefore, the T.W.C. deems that those distributions are considered wages by the T.W.C. - They didn't bother to ask us for our Operating Agreement to see if this issue is addressed. The field auditor, taxed us, changed my 2009 forms and told me that if I didn't like their decision, I could appeal under Rule 13 - however, the two T.W.C.'s supervisors above the field auditor - told me they would not rule in our favor. For a more impartial hearing, I have written a letter with a copy of every e-mail back and forth with the T.W.C. tax manager, to the Commissioner of the T.W.C. Texas L.L.C.'s came into being in 1991 - that is 19 years. I have been a bookkeeper for better than 38 years - I have spoken to many local C.P.A's and attorneys. Not one has ever heard of the T.W.C. taxing distributions to partners. Are any of you familiar with Section 1.5.3 of the T.W.C. law manual?

[Evan]

I am not familiar with Texas law. Perhaps they are considering the distribution to be a guaranteed payment, and they consider that wages for state-tax purposes. I don't know. Consult with a local CPA or attorney with how to proceed further.

[steved]

JFeems7560:
Unfortunately, your partnership has been nabbed by the TWC for an audit for issues that are very confusing and not widely known about. Many people (I think most, including tax preparers) post responses on the internet about compliance with Federal law for payroll and taxes, but fail to understand the state's view. Here it is in a nutshell (very brief):

1. The IRS does not officially recognize Limited Liability Companies as a reporting entity (except for payroll and various excise taxes). Thus, the entities must select (or accept the default) an entity classification. Your LLC selected to be a partnership. Federal law indicates that partners can divide profits and take distributions. They can also be paid "guaranteed payments", a form of compensation, subject to self employment tax, but not reported as wages. Now the drum roll.............

2. The Texas Workforce Commission recognizes Limited Liability Companies just as they recognize other entities (corporations, sole proprietorships, partnerships, etc). They have their own rules regarding compensation and definition of wages which may differ from just about anything you read about federal rules and partnerships or LLC's. The auditors were right about rule 1.5.3 of the Act.

I'm glad they stopped at the 9K max for state purposes. That may be a subtle hint as to how to avoid reporting all distributions as wages. Simply report the max that they can tax or be very creative in the "formula". I would think that if you had a clear "formula", even if there was little or no wages, as long as the partnership satisfies the rule, the auditors would not have a leg to stand on. It does not say anything about "reasonable" wages -- it only mentions a formula.

From what I read about federal payroll tax law, it generally defers to state law. An example can be seen in the instructions to form SS-4, on page 4, regarding disregarded entities -- it mentions you need an EI number if required for state purposes.

Good luck

[coffeedude]

Bump from 7 years in the future. Does anyone have more information on this issue? To explain my issue. My company is an LLC that has two members, so a partnership. We both are active in the business and pay ourselves via guaranteed payments on a bi-weekly basis. Though, the Texas Workforce Commission claims that our payments are viewed as wages by Texas, and hence are liable to be taxed for unemployment insurance purposes. Does anyone have any more info on whether or not this is the case. What it really comes down to is whether our guaranteed payments are considered 'wages'. Thank you!