Guaranteed payments to partners are payments meant to compensate a p

artner for services rendered or use of capital. Essentially, they are the equ
ivalent of a salary for partners or limited liability company (LLC) members.
These kinds of payments eliminate the risk of a partner making personal
contributions of time or property and then never getting compensated if t
he partnership does not prove to be successful.
The word "guaranteed" refers to the fact that these kinds of payments —
known as first-priority distributions — are made without regard to the par
tnership's profitability. In fact, such payments constitute a net loss for the
partnership. In addition, these payments can create special and unexpecte
d tax implications if they are not handled correctly. Income from a guara
nteed payment to a partner may be subject to self-employment tax, thou
gh that depends on the terms of payment.

example, a partnership could lose the ability to deduct a payment. Additi

onally, an ill-timed payment could increase the tax burden for a recipient,
for whom the payment is treated as ordinary income.
Consider the timing issues under a scenario that has the partner using th
e calendar year while the partnership's fiscal year ends September 30, 201
8. If a partner were to receive a guaranteed payment after September 30,
they would include the income in the following year. In effect, the paym
ent by the partnership would be recorded as having been made in Septe
mber 2019. More special tax considerations related to guaranteed paymen
ts to partners are highlighted in