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Partnership vs. S Corporation

Partnership vs. S Corporation--SE Tax

Problem: A partnership has two general partners. They each receive guaranteed payments in exchange for services rendered and pay SE tax on the guaranteed payments. However, the partners are also subject to SE tax on their distributive shares of partnership income, even though the income is not directly related to their services

Applicable Rules
General partners are subject to SE tax on guaranteed payments and their distributive shares of partnership income (IRC 1402). Each partner pays SE tax on his or her individual tax return.
Earnings from an S corporation are passed through to shareholders in the same manner as in a partnership, but the earnings are not subject to SE tax.
Note: S corporation shareholders are subject to FICA on amounts earned as employees of the corporation, computed the same as for any other employee.

Solution: Converting a partnership to an S corporation can eliminate SE tax on earnings.