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Tax Newsletter

Partners and Self-Employment Tax

The Internal Revenue Service generally requires self-employed individuals to pay self-employment taxes. How does this self-employment tax requirement apply to partnerships?

Generally, if you are a partner, your proportionate share of a partnership’s income or loss must be considered to determine your self-employment income. Guaranteed payments from the partnership are included.

Limited Partners

Because limited partners generally do not participate in the decision-making process of the partnership, only guaranteed payments from the partnership are included in the calculation of self-employment income.

Retired Partners

Sometimes retired partners still receive income from the partnership. The IRS does not consider this income to be subject to self-employment tax, as long as the partner receives lifetime periodic payments and does not provide any services to the partnership.

Husband & Wife Partners

If a husband and wife operate a business as a partnership, formally or informally, special forms are required by the IRS for reporting income and losses. However, just because a husband and wife are both in the same business does not necessarily mean that they are partners. One may be working for the other as an employee. In that case, the typical Social Security/Medicare taxes must be paid by the employer/spouse on behalf of the employee/spouse.

Investment Club Partnerships

A common partnership entity is an investment club partnership. This type of partnership has a number of individuals who collectively invest for profit. However, income will not be considered as self-employment income if the investment is limited to:

  • Investing in savings certificates, stock, or securities
  • Collecting interest or dividends for its members’ accounts
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