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%

Question

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)
Responses

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 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 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 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.
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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 partnership itself does not pay taxes on its earnings. Instead, the income "passes through" to the partners, who then report their respective shares of the income on their personal tax returns and pay taxes accordingly. So, in this case, Riley will pay taxes on 80% of the earnings, and Layla will pay taxes on 20% of the earnings.