Partner Patter

Today Alan from Texas says he is starting a partnership as a consulting business. He asks, “I understand that estimated taxes will be made on the income that the business makes, but do I also have to pay personal tax on the salary that I pay myself from that income in addition to the estimated taxes?


Hi Alan,

Oh my, it does sound complicated, doesn’t it?

Well, my friend, let’s make one thing easier right off the bat – partnerships do not pay income taxes. They file information returns.

So, the estimated payments you will be making will be for your personal income tax. You’ll be basing those estimated payments on a combination of any personal income and your projected share of the profits from your partnership.

You’ll find the formula to figure out how much you should pay in estimated taxes in an article on TaxMama.com called Estimated Payments Hate Them? But Pay them! The article also has links to the forms you need. http://www.taxmama.com/Articles-cur/es.html

But, before you compute your estimated taxes, you’ll need to understand a bit more about how partnerships work. Start with IRS Publication 541 http://www.irs.gov/publications/p541/index.html

Meanwhile, Here are some things you ought to know – When you file the Partnership Return, your share of the partnership’s income or certain expenses will be reported on a Schedule K-1 from the partnership. From there, it will be passed on to your personal tax return. That’s the income you’ll use to determine how to compute your estimated payments.

But there are three things I’d like you to understand about partnerships and their income:

1) The amount of money you receive from your partnership in the course of the year may not all be taxable. (There are other factors, paper losses, and it can depend on how much money you and others put into the partnership to fund it

2) Even if you don’t receive as much money as the books show is your share of the income, you will be paying tax on your share.

3) You will have to pay Social Security taxes (Self Employment taxes) on your share of partnership income, if you are a general partner. So be sure to add 15.3% of your projected profit to your estimated payments to IRS.

There’s a lot to know. And a lot of planning to do. So, please, invest a few bucks consulting with a tax professional before you start the business- and of course, before the meeting, read my book, Small Business Taxes Made Easy. It will help you organize your thoughts, and formulate the questions to ask your tax pro.

Naturally, you’ll find answers to all your questions about employment, taxes and all kinds of financial information, where? At TaxMama.com

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