Does the IRS pay closer attention to partnerships?

On Behalf of | Feb 13, 2017 | Tax Controversies

A majority of workers have federal, state and FICA taxes withheld from their paychecks. The withholding consists of the employee’s contributions and the employer’s matching share. For those who are self-employed or receive payments via a Form 1099, however, there are no withholdings. Instead, such professionals pay estimated taxes four times each year.

Let’s look at the example of a partnership. In a general partnership, each partner is liable for the partnership’s profits and liabilities. Consequently, the IRS regards each partner as self-employed, which includes the obligation to pay self-employment taxes and file a Schedule SE along with the Form 1045 Individual Income Tax Return.

What about the matching portion of withholding taxes? In a partnership, the same person functions as both payor and payee. However, the IRS allows partners a self-employment contribution from their taxable income. The deduction is needed, as partners would otherwise end up paying double what an employee would pay in withholdings.

No one likes to pay taxes, and an informed taxpayer may do well to maximize his or her deductions, credits and other tax-saving strategies. Yet smart tax strategy requires more work for self-employed workers and independent contractors.

In a partnership, business deductions are available for any expense related to the operations of the business. Eligible expenses may include travel costs, supplies, rent, and other costs. These deductions reduce the taxable income of the partnership, and consequently the tax liability.

Our Connecticut law firm has been helping clients to better understand the tax consequences of their business organizational structures for over 45 years. In addition to offering legal representation through legal troubles, we are able to offer strategies for minimizing total tax liability.

Source: FindLaw, “Self-Employment Tax,” copyright 2017, Thomson Reuters