I am opening a new business that will be operating as a partnership. How do I draw a paycheck?
~ Carrie Gill
You don’t. Partners, and members of LLCs taxed as partnerships, are considered to be self-employed, not employees when performing services for the partnership. The payments that a partner receives for services to a partnership are generally referred to as guaranteed payments. While guaranteed payments are taxable to the partner, these payments are not considered to be pay to an employee. As such, there will not be any withholding tax through payroll deductions. To avoid a tax shortfall when your tax return is filed, it is important to plan for these taxes, most commonly by making estimated tax payments. The partner’s allocable share of net income of the business and the guaranteed payments for services are reported to the partner annually on a Form k-1 generated by the business. The partner will be subject to both income tax and self-employment tax (Social Security and Medicare taxes) on his/her share of the “self-employment income” from the business. Partners can also receive distributions of capital (their investment) as a result of their ownership interest in the partnership, which is often a tax-free return of post-tax items including their investment and allocable earnings.