Are partners in a partnership classified as employees, or are they considered self-employed?

Classification of Partners in a Partnership for Tax Purposes

Partners in a partnership are generally not classified as employees for tax purposes. Instead, they are considered self-employed individuals. This classification affects how they report income and pay taxes. Here are the key points regarding the tax treatment of partners:

Self-Employment Status of Partners

- Partners in a partnership (including certain members of a limited liability company (LLC)) are considered self-employed, not employees, when performing services for the partnership. [Entities 1 | Internal Revenue Service]

- General partners must report their distributive share of the partnership's income or loss from the trade or business, as well as any guaranteed payments, as net earnings from self-employment. [Entities 1 | Internal Revenue Service]

- Limited partners are only subject to self-employment tax on guaranteed payments for services they rendered to the partnership, not on their distributive share of partnership income. [Entities 1 | Internal Revenue Service]

Partnership Tax Filing Requirements

- A partnership must file an annual information return (Form 1065) to report income, deductions, gains, and losses, but it does not pay income tax itself. [Partnerships | Internal Revenue Service]

- Profits or losses are passed through to partners, who then report their share on their personal tax returns. [Partnerships | Internal Revenue Service]

- Partners should not be issued a Form W-2; instead, they receive a Schedule K-1 (Form 1065) from the partnership. [Partnerships | Internal Revenue Service]

Self-Employment Tax Details

- Self-employment tax consists of Social Security and Medicare taxes for individuals who work for themselves. [Topic no. 554, Self-employment tax - Internal Revenue Service]

- You are required to pay self-employment tax if your net earnings from self-employment are $400 or more. [Topic no. 554, Self-employment tax - Internal Revenue Service]

- The self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare taxes. [Topic no. 554, Self-employment tax - Internal Revenue Service]

- There is an additional Medicare tax for self-employment income exceeding a threshold amount. [Topic no. 554, Self-employment tax - Internal Revenue Service]

Deductions for Self-Employment Tax

- Partners may deduct one-half of the self-employment tax when calculating their adjusted gross income. [Topic no. 554, Self-employment tax - Internal Revenue Service]

In summary, for tax purposes, partners in a partnership are treated as self-employed individuals. They must pay self-employment taxes on their earnings from the partnership and report their share of partnership income on their personal tax returns.

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Sources:
Entities 1 | Internal Revenue Service 2024-07-31

Partnerships | Internal Revenue Service 2024-08-04

Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs 2024-08-02

LLC Filing as a Corporation or Partnership | Internal Revenue Service 2024-08-03

Election for Married Couples Unincorporated Businesses 2024-08-02

Special Issues for Employees | Internal Revenue Service 2024-07-30

Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 2024-08-03

Single Member Limited Liability Companies | Internal Revenue Service 2024-08-03

Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions 2024-08-03

Topic no. 554, Self-employment tax | Internal Revenue Service 2024-08-02