A&M Tax Advisor Weekly
For anyone working in a partnership, making the leap from employee to partner is often a great career accomplishment. But from a tax standpoint, the achievement brings with it a number of new—and significant—tax considerations, particularly in the compensation and benefits arena. Both employers and employees should be aware of, and appropriately address, such considerations to avoid potentially costly consequences, effectively turning a great achievement into a compliance nightmare.
Some of the most common compensation and benefits issues encountered by partnerships include:
While an employee of a partnership, an individual’s wages are subject to federal and state (where applicable) income and employment tax withholding (e.g., Medicare and Social Security) and reporting (Form W-2). But when the individual becomes a partner, his or her compensation is no longer subject to employer withholding of these taxes, since the individual is no longer considered an “employee” of the company. Rather, the individual must typically make quarterly estimated tax payments (often federal and state) to the appropriate taxing authorities. Additionally, the individual must pay self-employment tax, which is equal to the employee and employer portions of Social Security and Medicare tax.