This week’s question comes from Mark, a partner in a partnership. I’ve just been made a partner in a partnership. As an employee, I was participating in the company’s Flexible Spending Arrangement (FSA) plan. I’ve been told I can no longer participate. Can a partner participate in an FSA? Answer: FSAs, sometimes called “Flexible Spending Accounts”, are generally setup for reimbursement of medical or dependent care expenses. Partners in a partnership (including LLCs and other similar entities that have elected to be treated as a partnership for tax purposes) are considered self-employed individuals. As such, they are not eligible to participate in an FSA sponsored by the partnership in which they are a partner. Contact Vision Payroll if you have further questions on FSA eligibility.
This week’s question comes from Carl, a partner in a partnership. I am an investor in a partnership and own a 25% interest as a partner. I also work for the business that the partnership owns. Can I be paid through payroll, have tax withheld, and receive a Form W-2? Answer: It is long established in tax law that partners in a partnership are not employees of the partnership. In Rev. Rul. 69-184, 1969-1 CB 256, the Internal Revenue Service confirmed this, stating:
Remuneration received by a partner from the partnership is not “wages” with respect to “employment” and therefore is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration also is not subject to Federal income tax withholding.
Partners cannot receive a Form W-2 from the partnership. They may receive a draw from the partnership and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.
The Massachusetts Department of Revenue (DOR) has clarified its position on the deductibility of 401(k) contributions. In Income Tax Directive 08-3, effective for 2008 and later years, the DOR denied deductions for 401(k) contributions for partners and self-employed individuals, whether the contributions are elective or matching. This is in direct conflict with and supersedes earlier DOR positions that explicitly allowed partners and self-employed individuals a deduction for elective contributions to 401(k) plans.
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