Why Partners Should Never Get a W-2
Why Partners Should Never Receive a W-2 (And What to Do Instead)
If you’re a partner in a business—whether it’s a general partnership, limited partnership, or a multi-member LLC taxed as a partnership—here’s a critical tax rule you need to know: You should never receive a W-2 form from your own partnership.
It might seem like a small paperwork detail, but issuing a W-2 to a partner is more than just a clerical mistake—it’s a fundamental misunderstanding of how partnerships work under U.S. tax law. And getting it wrong can lead to serious consequences, including IRS scrutiny, penalties, and even double taxation.
Let’s break down why partners don’t get W-2s—and what they should receive instead.
🤝 Partners Are Owners, Not Employees
This is the core principle: Partners are not employees of the partnership—they are co-owners.
The IRS has been clear on this for decades (see Revenue Ruling 69-184). Because a partnership is a “pass-through” entity, its profits and losses flow directly to the partners’ personal tax returns. That means partners aren’t paid wages; they receive their share of the business’s income (or loss), regardless of whether cash actually changes hands.
So when a partnership issues a W-2 to a partner, it’s treating an owner like an employee—which simply doesn’t align with the legal and tax structure of a partnership.
📄 W-2 vs. Schedule K-1: Know the Difference
- W-2: Used for employees. Shows wages, taxes withheld, and employer-paid payroll taxes.
- Schedule K-1 (Form 1065): Used for partners. Reports each partner’s share of income, deductions, credits, and other tax items from the partnership.
Partners receive a K-1, not a W-2. They’re responsible for paying income tax and self-employment tax on their distributive share—usually through quarterly estimated tax payments.
⚠️ The Risks of Issuing a W-2 to a Partner
Mistakenly treating a partner as an employee can cause several problems:
- Payroll tax errors: You may end up paying (and withholding) both the employer and employee portions of Social Security and Medicare—unnecessarily.
- Double taxation risk: The same income could be taxed twice—once as “wages” and again as partnership income.
- Retirement plan complications: Contributions to plans like a 401(k) can’t be made via W-2 wages for partners.
- IRS red flags: Incorrect W-2s can trigger audits or penalties for misclassification.
💡 What About Guaranteed Payments?
Sometimes partners receive regular payments for services (like managing the business) or for capital contributions. These are called guaranteed payments—and while they resemble a salary, they are not wages.
Guaranteed payments are:
- Reported on Schedule K-1, not a W-2
- Subject to self-employment tax
- Deductible by the partnership
Think of them as compensation for work or investment—but still within the framework of ownership, not employment.
🧾 Real-World Example
Imagine Alex and Taylor run a consulting firm as a 50/50 partnership. Each month, they each take $8,000 from the business.
❌ Wrong: The partnership issues each a W-2 for $96,000/year.
✅ Right: The partnership files Form 1065 and gives each a Schedule K-1 showing their share of income (including any guaranteed payments). Alex and Taylor then report that income on their personal returns and pay self-employment tax as required.
✅ Bottom Line
If you’re a partner—or manage a partnership—remember: No W-2s for owners. Stick to Schedule K-1s, handle self-employment taxes properly, and keep your books aligned with IRS rules.
When in doubt? Talk to a tax advisor. A small paperwork fix today can save you big headaches tomorrow.
Disclaimer: This post is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.