Small business Tax Questions - How Are Partners Taxed?

###Small business Tax Questions - How Are Partners Taxed?### Advertisements

If you are a partner in a partnership, are you wondering how your earnings from the partnership is taxed? This report will rejoinder that question.

Medicare Part

By "partner", I'm referring to someone who is in business with at least one other someone and you've agreed to share in the profits and/or losses of the business. A partnership files its federal annual earnings tax return on Form 1065 due April 15 each year.

By "partner" I'm also referring to owners of a minuscule liability business (Llc) who have not chosen to be taxed as a corporation. By default, a multi-member Llc is taxed as a partnership and will also file Form 1065 annually.

Now to the question at hand: How are these partners or Llc members taxed?

You are not treated as employees. Partners and/or Llc members are not paid wages or salaries. So do not sustain earnings taxes or payroll taxes (such as group safety and Medicare taxes) from your compensation. At the end of the year, you will not receive a Form W-2.

Of course, should you have other non-owner staff who are being paid as employees, you should assuredly issue paychecks to them, withholding the accepted earnings taxes and payroll taxes, and giving them a W-2 at the end of the year. But never treat yourself as an employee.

Instead of receiving a W-2, the partners and Llc owners receive a agenda K-1 from the business at the end of the year. This K-1 is part of the partnership federal earnings tax return and reports each owner's share of the business profit or loss. Should the business have a profit, this profit is then reported on the partners' personal earnings tax return via agenda E (page 2) of Form 1040, where it is field to both earnings tax and self-employment.

So there's a sense in which the partnership owners are treated as sole proprietors for federal tax purposes. This is because not only do the partners pay federal earnings tax on the K-1 income, but they must also pay self-employment tax. Each partner's share of partnership earnings must also be reported on agenda Se of Form 1040, which is the form used to speculate self-employment tax, the self-employed person's version of group safety and Medicare taxes.

Should the partnership have a loss, the partner's share of that loss is also reported on agenda K-1, and that loss is then transferred to partner's personal tax return, where it is generally deducted against other sources of income.

One final comment: depending on the K-1 earnings amount, partners and Llc members generally must make federal regular estimated tax payments. Be sure to check with your tax expert to rule the number of those payments. Failure to make them can ensue in penalties for underpayment of estimated tax payments.

Small business Tax Questions - How Are Partners Taxed?