Is Partnership Income Subject to Self Employment Tax?

The tax obligations for individuals in a partnership depend on their role within the business. For tax purposes, partners are considered self-employed individuals rather than employees. This means that instead of having taxes withheld from a paycheck, partners are responsible for paying their own taxes directly to the government. A component of this responsibility is the self-employment tax, which covers Social Security and Medicare contributions.

The amount of income subject to self-employment tax depends on whether the individual is a general partner, a limited partner, or a member of a Limited Liability Company (LLC) that is taxed as a partnership. A partner’s level of involvement in the business operations is a factor in determining their tax liability.

Tax Treatment for General Partners

A general partner is an owner who is personally involved in the day-to-day management of the partnership’s business. This active participation comes with unlimited liability, meaning their personal assets could be at risk to satisfy the partnership’s debts. The rule is that a general partner’s net earnings from the partnership are subject to self-employment tax.

These net earnings are composed of two main elements. The first is the partner’s distributive share of the partnership’s ordinary business income, which is their portion of the profits regardless of whether the money is actually distributed to them. The second element consists of any guaranteed payments the partner receives for services rendered to the partnership.

To illustrate, consider a general partner with a 50% stake in a partnership that generates $100,000 in ordinary business income. Their distributive share is $50,000. If that same partner also receives a $30,000 guaranteed payment for their management services, their total earnings subject to self-employment tax would be $80,000.

Tax Treatment for Limited Partners

In contrast to a general partner, a limited partner functions as a passive investor in the partnership. Their liability for the partnership’s debts is limited to the amount of their investment, and they are prohibited from taking an active role in managing the business. This passive involvement creates a distinction for self-employment tax purposes. A limited partner’s distributive share of partnership income is not considered net earnings from self-employment.

This exemption exists because the income received by a limited partner is viewed as a return on their capital investment rather than as payment for services performed. Their role is analogous to that of a shareholder in a corporation, whose dividends are not subject to employment taxes. Therefore, the profits that pass through the partnership to a limited partner are not subject to the 15.3% self-employment tax.

An exception to this exemption exists. If a limited partner receives guaranteed payments for services provided to the partnership, those payments are subject to self-employment tax. For instance, if a limited partner who is an accountant provides specified accounting services to the partnership and receives a guaranteed payment for that work, that payment is treated as self-employment income. The distributive share of the partnership’s business income, however, would remain exempt.

Special Considerations for LLC Members

Limited Liability Companies (LLCs) that are taxed as partnerships present a more complex situation for self-employment tax. While an LLC provides its members with limited liability, the IRS does not automatically treat all members as “limited partners” for tax purposes. The classification of an LLC member’s income depends on their actual role and participation in the business.

The determination is whether an LLC member’s involvement is active or passive. If a member is actively engaged in the business operations, they are often treated as a general partner, and their distributive share of the LLC’s business income is subject to self-employment tax. The IRS and courts apply a “functional analysis test” to determine a member’s status, looking beyond their official title.

Factors considered include the member’s management authority, the number of hours they participate in the business, and the extent of their services. A member who manages the LLC’s daily operations and works full-time for the business would be treated as a general partner. Conversely, a member who merely invested capital and has no management rights or service responsibilities might be treated as a limited partner, with their distributive share exempt from the tax.

Calculating and Reporting the Tax

Once a partner determines which portion of their income is subject to self-employment tax, the next step is to calculate and report it on their personal tax return. The process begins with information provided by the partnership on Schedule K-1 (Form 1065). The figure for “Net earnings (loss) from self-employment” is found in Box 14 with code ‘A’.

The first calculation step involves multiplying the amount from Box 14, code A, by 92.35%. This adjustment accounts for the eventual deduction of one-half of the self-employment tax, which is analogous to the deduction employers get for their share of FICA taxes. The result is the amount used to figure the tax.

This calculated amount is then transferred to Schedule SE (Form 1040), “Self-Employment Tax.” The calculation involves a 12.4% Social Security tax on earnings up to the annual limit ($176,100 for 2025) and a 2.9% Medicare tax on all net earnings. An Additional Medicare Tax of 0.9% may also apply to earnings exceeding certain thresholds, such as $200,000 for single filers or $250,000 for married couples filing jointly.

The total self-employment tax from Schedule SE is reported on Form 1040 and added to the income tax liability. Taxpayers can also deduct one-half of their self-employment tax from their adjusted gross income (AGI). This is an “above-the-line” deduction, meaning it can be taken even if the taxpayer does not itemize deductions.