Treating Partners as Employees: Risks to Consider
Journal of Accountancy, 2014
6 Pages Posted: 24 Oct 2017
Date Written: August 1, 2014
More and more businesses, including partnerships, are awarding equity interests to valued employees to keep them. Partnerships often are unaware that even a small equity interest can stop the new partner from continuing to be treated as an employee for tax purposes. Failure to treat these partners correctly can have numerous adverse tax effects, such as overpaying FICA tax, causing benefits paid on the partner’s behalf to be taxable to the partner, and accelerating the taxation of certain bonus payments. Other risks include problems with state tax apportionment formulas and miscalculating the Sec. 199 domestic production activity deduction. Although several planning techniques are available to avoid this problem, none are without shortcomings.
Keywords: Partnership, Employee, Parter as employee
JEL Classification: K34
Suggested Citation: Suggested Citation