Help Me With Wages Paid To Partners

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Dear Brass Tax Presentations,

I’ve taken your courses for a few years – since I started preparing returns officially. I have a question about partnership (1065) and payroll. We set up payroll for the partners however, the 1065 doesn’t have a wage spot for partners. How do I report the partners’ wages?

Thanks for your help.


From Brass Tax Presentations

It is almost always against the rules to pay a partner of a partnership as an employee. If the partners are being paid for services they render to the partnership, those are generally considered guaranteed payments. W-2s are not issued for guaranteed payments; they are listed as guaranteed payments to the partners on their K-1. These guaranteed payments are also deducted from the partnership’s ordinary business income on the first page of Form 1065.

The correct procedure to fix this problem, from a technical standpoint, is to issue corrected W-2s to the partners indicating zero wages (and withholding), and to amend all 941s and the 940 to eliminate any “wages” paid to partners. The net amount paid to partners should be recorded as guaranteed payments on the partnership return.

As a practical matter, you should, at the very least, stop treating amounts paid to partners as wages for 2024 and beyond. If the partners receive specified amounts for the work they perform as part of their agreement, those should be treated as guaranteed payments. However, if the amounts that were incorrectly run as payroll were simply to get money out of the partnership and not based on the services they performed (ie, partners received payments that were proportional to their ownership interest in the partnership), then those should really be treated as distributions and not guaranteed payments. The benefit to treating these amounts as distributions (as opposed to guaranteed payments), is that profit distributions qualify for QBI (guaranteed payments do not qualify for QBI).

Generally, both guaranteed payments and profit distributions from closely held partnerships operating a trade or business are subject to SE tax on the partners’ individual income tax returns.

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