Guaranteed Payments

Guaranteed payments are amounts a partnership pays a partner for services or for the use of capital that are determined without regard to partnership income, functioning like a salary for someone who legally cannot be their own W-2 employee. The partnership deducts them, and the receiving partner reports them as ordinary income subject to self-employment tax, regardless of whether the partnership was profitable. They matter in three places: compensating working partners fairly when profit splits do not reflect labor, creating a deduction that shifts income among partners, and QBI planning, since guaranteed payments are excluded from qualified business income for the recipient. Many partnerships restructure guaranteed payments into priority profit allocations for that reason. Guaranteed payments appear on the partner's K-1 and are reported even if cash was paid the following year.