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As a partner in an LLC (receiving a K1, not a W2), receiving ordinary income, not earned income, and making estimated quarterly tax payments, does one also make quarterly SS and Medicare payments? Is one considered self-employed and therefore contribute the full 15%+ and 6%+?

Any help is appreciated,

Greg
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As a partner in an LLC (receiving a K1, not a W2), receiving ordinary income, not earned income, and making estimated quarterly tax payments, does one also make quarterly SS and Medicare payments? Is one considered self-employed and therefore contribute the full 15%+ and 6%+?

I think we would need to know more about what the LLC does and the nature of your relationship to it before you could get an answer that made any sense.

Ira
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I'll be a partner in a proprietary trading firm, receiving a portion of the trading profits I generate for the partnership. This is ordinary income, not earned income (making me ineligible for an IRA or 401k). The income is not taxed by the partnership, requiring me to make estimated quarterly tax payments. My question is whether I will also owe SS and medicare on that ordinary income?

Greg
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As a partner you may or may not be responsible for SE/Medicare taxes depending on the nature of your earnings from the partnership, but you seem to ralize this and suggest you do NOT actively participate. That is, the partnership generates passive income such as from stocks and investments rather than a going business, like a grocery store or production from oil wells. So:

If you ARE required to pay SE/Medicare taxes, yes they are paid along with your ES quarterly installments. If you ARE NOT subject to SE taxes, why did you ask?

Only you know if this is earned income or "ordinary income". ed
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As a partner in a trading firm you are not sutject to SE taxes, so don't compute or include them in your tax estimates. Your trading firm should be able to better answer any tax questions you have than we are. It is a whole other world and you are likely to get totally wrong answers to "out-of-context" questions from us because we are NOT traders. ed
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As a partner in a trading firm you are not sutject to SE taxes, so don't compute or include them in your tax estimates. Your trading firm should be able to better answer any tax questions you have than we are. It is a whole other world and you are likely to get totally wrong answers to "out-of-context" questions from us because we are NOT traders. ed

Ed is right. I held back on commenting until I could confirm with a CPA buddy of mine who is also an ex-trader. Rules for traders are very different.

If you have specific questions, present them with as much detail as possible and I will try to relay the Qs and As.

Ira
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My understanding is that I am not self-employed (or I wouldn't receive a K1, right?), therefore won't pay SS or Medicare, but must pay quarterly estimates on the passive (investment) income I receive through the partnership.

As to trader tax questions, the main two are (1) do you qualify for trader tax status, and (2) do you use MTM accounting with regard to booking profits and losses. I think question 2 is handled at the partnership level and would only apply to me on my personal accounts, while I'm still. Question one would apply to only to my deductible expenses, as losses would be deducted on the partnership level as well. I probably need to speak with a CPA in more detail on these two questions.

In any case, my question was really with regard to SS and Medicare obligations, and it sounds like you guys confirm that passive income does not generate any SS or medicare obligations.

Greg
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My understanding is that I am not self-employed (or I wouldn't receive a K1, right?), therefore won't pay SS or Medicare, but must pay quarterly estimates on the passive (investment) income I receive through the partnership.

While you are correct that you are not self-employed, receipt of a K-1 has no relevance to that fact. If you were a member of an LLC that ran a business (such as a store) you could very well be self-employed.

As to trader tax questions, the main two are (1) do you qualify for trader tax status, and (2) do you use MTM accounting with regard to booking profits and losses. I think question 2 is handled at the partnership level and would only apply to me on my personal accounts, while I'm still. Question one would apply to only to my deductible expenses, as losses would be deducted on the partnership level as well. I probably need to speak with a CPA in more detail on these two questions.

Trader status is a "facts and circumstances" issue. It depends on how you trade, how long you keep your positions open, etc. There are some good resources available on the web and one reputable book, but the specific citations elude me now. My ex-trader CPA source says that you are "likely" to qualify for trader status and use MTM accounting. You will need to find someone with relevant expertise to review the specifics of your situation and advise you appropriately.

Ira


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You will need to find someone with relevant expertise to review the specifics of your situation and advise you appropriately.

I think definitely speaking with someone with expertise will be necessary.

Could you pass along one more question to your CPA friend? Claiming trader tax status must be done by the filing deadline the previous year (April 15), but there's some exception for starting with or in a business after that deadline that allows you to claim it then and not wait until the next year. Could you verify that with your CPA friend?

Thanks,
Greg
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