Partners on Payroll

Today TaxMama hears from Allison who’s a bookkeeper in Angola, IN. She says, “I do the bookkeeping for 3 partners. They get paid by the mile for work they do and they split the money they make evenly each week. They want to be paid as employees so they don’t have to make estimated tax payments. The taxes would be withheld and deposited monthly on their behalf. The partnership would pay the employer match for FICA. At year-end, they would get a W-2 as well as their K-1. Can we do this?”


Dear Allison.

Uh, no. Good try, though.

Partners can’t be employees of their partnerships. They can get guaranteed payments, but that’s not the same thing.

Here are your alternatives so you can help your bosses address this issue:

1) You can take withholding from each payment, put the money into a business savings account, then, each quarter make estimated payments for them. Be sure to provide that information to the partnership’s tax professionals, so they can include the withholding on their K-1s. Their weekly earnings should show up on the K-1s as guaranteed payments.

2) Or you suggest that they form an LLC or an S-Corporation. Then they may be on payroll, and can explore other tax savings ideas

It sounds like they’re doing well. It’s time for them to sit down with their tax professional and do some tax planning and retirement planning.

Like this…http://www.taxmama.com/AskTaxMama/181/401k.html

And remember, you’ll find answers to lots of business and other tax information, free. Where? At TaxMama.com

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