When do limited partners have to pay self-employment taxes on their distributive share of partnership income?

Although limited partnerships have been around for decades, there has never been a definitive answer to this question. But we’re getting close. The IRS and the courts are trying to require active limited partners to pay self-employment tax.

The Limited Partner Exception to Self-Employment Taxes

Self-employment taxes are substantial, and most people want to minimize them. They consist of a 12.4 percent Social Security tax up to an annual income ceiling adjusted for inflation each year ($168,600 for 2024) and a 2.9 percent Medicare tax on all self-employment income (i.e., net earnings from self-employment). Thus, the tax is 15.3 percent up to the ceiling and 2.9 percent thereafter.

If net earnings from self-employment are over $200,000 for single taxpayers, or $250,000 for those who are married filing jointly, self-employed taxpayers must pay a 0.9 percent additional Medicare tax on net earnings from self-employment over the applicable ... Log in to view full article.