Explain Guaranteed Payments to Partners?

Guaranteed payments to partners are first-priority distributions that will be made to a partner, even if a business is losing money. These payments are made to ensure that a partner is paid for certain contributions made at an earlier date to the partnership entity. These earlier contributions may be of any type, including cash, tangible assets, or services.

DEFINITION: Guaranteed Payments To Partners is the Payments that are guaranteed to be made to a partner irrespective of whether the partnership makes a profit or not. Guaranteed payments to partners are made to ensure that partners are compensated for specific contributions they make to a partnership, whether in the form of goods or services. This eliminates the risk of their making personal contributions of time or property for which they are never paid if the partnership is not successful.

EXPLAINS: Guaranteed Payments To Partners are guaranteed payments essentially function as a form of salary for partners. This income may be subject to self-employment tax, depending on the terms of payment. Guaranteed payments are considered first-priority distributions and will be paid out even if the partnership is losing money.

Guaranteed payments reduce the risk to a partner of not receiving a return of an initial investment in a business, and so can be used to entice a partner into a partnership.

Guaranteed payments are not subject to income tax withholding by a partnership. From the perspective of the partnership, a guaranteed payment is considered a deduction used to calculate ordinary income. This can mean that a partner will receive a guaranteed payment, and then receives an additional distribution from the partnership that represents a share of the remaining ordinary income of the entity. The receiving partner treats a guaranteed payment as ordinary income for tax reporting purposes.