Owning and operating a business may seem easier with a partner. However,
it is important to understand the regulations related to taxation on
your business partnership.
A partnership is an unincorporated business owned by two or more people. This business model does not fall into the same tax category as corporations or LLCs, which means that taxes are not levied against the business itself. As profits and losses pass through the business to the partners, so do taxes. Each partner in the business must be aware of their personal profits and losses in order to file correctly.
Although profits from a partnership are paid by the
individual owners, it is necessary for the entity to file a profit and
loss statement, Form 1065, to the IRS each year. Additionally, each
partner should receive a K-1 form, which allocates individual profits
and losses based on percentage of ownership as delineated in the
business agreement. Individual partners use the K-1 form to complete
their personal 1040 tax return.
Waiting until you receive a K-1 form from your business could be a costly mistake. A wise practice is to maintain a working estimate of the taxes you may owe. This allows you to set aside funds for tax purposes in advance.
Individuals who form a partnership are not considered a corporation, nor are they considered an employee. In the eyes of the IRS, each partner is a self-employed individual. As such, it is necessary to include a Schedule SE with the standard 1040 tax return form.
Those who are self-employed pay twice the amount that salaried employees pay in taxes. This is because the entire share of Medicare and Social Security fall onto the individual, who is, in this situation, both the employee and the employer. Additional issues relating to partnerships include the distribution of shares and special allocations. These facets can create difficulty in navigating tax returns and strategies.
At Whyte and Associates, we make filing tax returns as simple and stress-free as possible. From our office in Rancho Cucamonga, CA, we serve partnerships, small business, and individuals from all over Southern California. With a wealth of knowledge and up-to-date information on current tax laws, we can help you identify every possible credit and deduction, and can also discuss the benefits of incorporating your business partnership.
Call (909) 575-0080.