Riley and Layla are interested in forming a partnership but are concerned about the associated taxes. If the partnership agreement is set such that 80% of earnings go to Riley and 20% go to Layla, which of the following correctly describes how taxes will be paid on the earnings?(1 point)

Question

Responses

Riley and Layla will each pay personal income tax on half of the partnership's total earnings regardless of how the earnings are distributed.
Riley and Layla will each pay personal income tax on half of the partnership's total earnings regardless of how the earnings are distributed.

The partnership itself will pay the tax on total earnings before the earnings are distributed to Riley and Layla.
The partnership itself will pay the tax on total earnings before the earnings are distributed to Riley and Layla.

Riley and Layla will each pay personal income tax on the portion of earnings that is theirs.
Riley and Layla will each pay personal income tax on the portion of earnings that is theirs.

The partnership itself will pay the tax on each portion of earnings after they have been distributed to Riley and Layla.
The partnership itself will pay the tax on each portion of earnings after they have been distributed to Riley and Layla.

Answer 1

The correct response is:

Riley and Layla will each pay personal income tax on the portion of earnings that is theirs.

In a partnership, the entity itself does not pay income taxes; instead, the earnings are passed through to the partners, who report their share of the income on their individual tax returns. Therefore, Riley will pay taxes on the 80% of earnings designated for him, and Layla will pay taxes on the 20% of earnings designated for her.