After a recent incident that tested the boundaries and definition of Tax Code Section 1402(a)(13), the IRS has reiterated the fact that managers and/or presidents of LLCs are not considered limited partners and thus must pay self-employment tax on any received shares from their companies.
The issue arose when a business owner, for tax-purposes, treated all of his franchise restaurants as a partnership. The franchise owner was in charge of overseeing all aspects of the partnership. Hoping to reduce his amount of employment tax due, this particular man attempted to dispense his self-employment taxes into two separate categories – income due to capital investment, thus eliminating the self-employment tax completely, and general income for services rendered. From the partnership’s standpoint, this reallocation was valid since the franchisee was not the literal person selling the products, the employees were.
The IRS, however, did not agree with that view. According to the IRS, the franchiser could not be considered a limited partner by Section 1402(a)(13) since he was the was the sole manager in power and was actively engaged in the overall operation of the partnership. Thus, he was and is subject to self-employment tax on his share from the partnership.