How Partners Are Taxed
Each partner acts as an agent of the partnership when carrying out partnership business.
Tax Status of a Partner
For federal income tax purposes, a partner is considered self-employed and is not considered an employee of the business. Each partner pays income taxes and self-employment taxes on his share of partnership net income.
Each partner reports his share of partnership net income (or loss) on Schedule E and carries the income or loss from Schedule E to Form 1040..
As a self-employed person, a partner is pays self-employment tax on net earnings from self-employment of $400 or more. Schedule SE is used to figure self-employment tax and is filed along with Schedule E and Form 1040.
The partnership files Form 1065 annually to report the partneship's income, deductions, credits, gains, and losses. Form 1065 is simply an information return. The partnership entity does not pay income taxes.
The partnership issues Schedule K-1 annually to each partner to report each partner's share of income, deductions, credits, gains, and losses. Items reported on Schedule K-1 retain their tax characteristics when reported on each partner's personal income tax return..
For example, a charitable contribution made by the partnership remains a charitable contribution when passed through the entity to each partner. Each partner deducts his share of such contributions as an itemized deduction on Schedule A (assuming the partner itemizes).
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- Return to the Tax Basics for Startups Table of Contents to find related links.