Startup business owners must consider the legal and tax considerations associated with selecting a particular type of business structure. This is the third part of a series of blogs on the tax treatment of business entities. This blog will address the tax treatment of partnerships.
A partnership is an association of two or more persons who carry on a trade or business. Each partner shares in the profits and losses of the business enterprise, while contributing money, property, labor or skill to its operation.
Partnerships are often referred to as pass-through or flow-through entities. Why? A partnership doesn’t pay any income tax at the partnership level; to report income and expenses, it files an information return through Form 1065, U.S. Return of Partnership Income. The partnership then passes this information to its partners on Schedule K-1, Partner’s Share of Income, Credits, and Deductions. Each individual partner reports his or her share of the partnership net profit or loss on Form 1040. This share of partnership income must be reported even if it is never distributed to partners in the particular tax year.
Because partners are not employees of the partnership, taxes are not withheld from any distributions made during the year. Thus, like sole proprietors, partners should make quarterly estimated tax payments. Because partners are not employees, they should not be issued a Form W-2.
General partners are required to pay self-employment tax on net earnings from self-employment assigned by the partnership. Net earnings from self- employment include a partner’s share, whether or not distributed, of profit or loss from the partnership’s trade or business. Limited partners are only subject to self-employment tax on guaranteed payments, such as professional service fees.
An experienced and knowledgeable tax professional may help any individual or business assess their current tax situation as it stands in the present looking ahead to the future. If you are an individual or business in the New York or Tri-State area and have any question about taxes, especially in planning ahead for the next filing season, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
