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Taxes for partners in partnership

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netnameus

Junior Member
State: TENNESSEE

I am part owner with another person for a web design company. We just recently brought on an "employee" and are learning the ins and outs of taxes we need to withhold, etc for that employee (any resources you have would be very helpful!)

Anyway, I was curious how my partner and I should handle our individual taxes. Do we consider ourselves as employees, and tax like any other normal employee?

We are classified as a general partnership.

Thanks in advanced
 


LdiJ

Senior Member
netnameus said:
State: TENNESSEE

I am part owner with another person for a web design company. We just recently brought on an "employee" and are learning the ins and outs of taxes we need to withhold, etc for that employee (any resources you have would be very helpful!)

Anyway, I was curious how my partner and I should handle our individual taxes. Do we consider ourselves as employees, and tax like any other normal employee?

We are classified as a general partnership.

Thanks in advanced
I would recommend using a payroll service for your employee. You could also pay yourselves a regular paycheck with regular withholding as well....and have the balance of the income be reported as you have in the past. Payroll services are very cost effective because they not only handle the withholding, but the also do the monthly/quarterly/yearly tax forms and deposits for you.
 

abezon

Senior Member
Yep, payroll service. Or at least a consult with a good bookkeeper.

Partners cannot be employees of a p'ship. You'll need to send quarterly tax estimates instead. A partner pays income & SE taxes on all net profits, whether s/he takes distributions or not.

If you want to get a salary & take remaining profits as dividends not subject to SE taxes, you need to be an S-corp, C-corp, or LLC electing to be taxed as a corp.
 

LdiJ

Senior Member
abezon said:
Yep, payroll service. Or at least a consult with a good bookkeeper.

Partners cannot be employees of a p'ship. You'll need to send quarterly tax estimates instead. A partner pays income & SE taxes on all net profits, whether s/he takes distributions or not.

If you want to get a salary & take remaining profits as dividends not subject to SE taxes, you need to be an S-corp, C-corp, or LLC electing to be taxed as a corp.
There isn't anything stopping a partnership from issuing ordinary payroll checks to the partners....the end result is the same tax wise. The same amount of SE taxes gets paid on the same income. I know it can be done because I DID IT....LOL. I used to own a restaurant with partners (long story, dumb move, lost my shirt) however we were a partnership who issued regular paychecks with withholding to the partners. All the IRS cared about was getting the proper amount of all taxes at the end of the year, from all of us....which they did.
 

abezon

Senior Member
Actually, you were taking either draws or "guaranteed payments" & making estimated payments to the IRS. So sayeth the IRS in Reg. 1.707-1(c) -- 'a partner who performs services for the p'ship is not considered an employee & should never receive a W-2 from the p'ship.'

Partner draws cannot be deducted as expenses on the partnership return; wages to others & guaranteed payments to partners can. If everything runs as a profit, this is fine, as long as the partners pay SE taxes on net profits whether reported as 'wages' or draws or just plain profits. If the p'ship has a loss, the partners get screwed -- they pay employment taxes on $50,000 & take a $10,000 ordinary loss, which results in them paying more SE taxes than if they had just paid employment taxes on $40,000.
 

LdiJ

Senior Member
abezon said:
Actually, you were taking either draws or "guaranteed payments" & making estimated payments to the IRS. So sayeth the IRS in Reg. 1.707-1(c) -- 'a partner who performs services for the p'ship is not considered an employee & should never receive a W-2 from the p'ship.'

Partner draws cannot be deducted as expenses on the partnership return; wages to others & guaranteed payments to partners can. If everything runs as a profit, this is fine, as long as the partners pay SE taxes on net profits whether reported as 'wages' or draws or just plain profits. If the p'ship has a loss, the partners get screwed -- they pay employment taxes on $50,000 & take a $10,000 ordinary loss, which results in them paying more SE taxes than if they had just paid employment taxes on $40,000.
Well..its true we didn't issue ourselves W2s. So yes, we were taking "draws" and paying estimated taxes. However the payroll service did handle it for us, which was very convenient.
 

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