Partnerships and the Differences in how they are treated for SE Tax

Self-Employment Tax for Partnerships: How General vs. Limited Partners Are Treated

When forming or joining a partnership, it’s important to understand not just how profits are shared but how taxes—especially self-employment (SE) taxes—apply to your earnings. For small business owners and professionals entering partnerships, especially in service-based firms, knowing the tax treatment of general and limited partners can help you avoid surprises come tax season.

In this blog, we’ll walk through how partnerships work, how self-employment tax applies, and why your role in the partnership (general vs. limited partner) can dramatically affect your SE tax liability.

What Is a Partnership?

A partnership is a business structure where two or more individuals or entities share ownership. The business itself doesn’t pay income tax—instead, it’s a pass-through entity, meaning profits (and losses) flow through to the partners’ individual tax returns.

There are different types of partnerships, but the most common include:

• General Partnerships: All partners manage the business and share in profits, losses, and liability.

• Limited Partnerships (LPs): There’s at least one general partner (with management control and full liability) and one or more limited partners (who invest in the business but do not participate in management and have limited liability).

Now let’s talk about how that affects your self-employment tax.

How Self-Employment (SE) Tax Works

Self-employment tax primarily covers Social Security and Medicare taxes, which W-2 employees pay through payroll withholding. For self-employed individuals, including many partners, these taxes are paid directly through estimated payments and are calculated on net earnings from self-employment.

As of 2025, the self-employment tax rate is 15.3% on net earnings up to a certain income threshold, and 2.9% on earnings above that for Medicare, with an additional 0.9% Medicare surtax for high earners.

General Partners and SE Tax: Fully Subject

If you are a general partner, the IRS treats your distributive share of partnership income as self-employment income—meaning:

You pay SE tax on your share of the profits, whether or not you receive a distribution.

You also pay SE tax on guaranteed payments (essentially, a salary-like payment from the partnership for services rendered).

Example:

Sarah is a general partner in a small consulting firm. The partnership earns $200,000 in net profit, and her share is 50% ($100,000). She also receives a guaranteed payment of $20,000 for managing the firm.

Sarah will owe SE tax on $120,000 ($100,000 profit + $20,000 guaranteed payment), in addition to income tax.

Limited Partners and SE Tax: Often Exempt

The IRS treats limited partners differently. Since they’re typically passive investors and don’t participate in management, their distributive share of income is not subject to SE tax.

However, guaranteed payments to limited partners are subject to SE tax if they are compensation for services rendered.

Example:

Mike is a limited partner in the same consulting firm. His share of the profit is also $100,000. He doesn’t receive a guaranteed payment and does not help run the business.

Mike’s $100,000 is not subject to SE tax.

But if Mike also receives a $15,000 guaranteed payment for occasional consulting, that $15,000 would be subject to SE tax, while the remaining $100,000 would not.

A Note on LLCs Taxed as Partnerships

Many businesses are formed as LLCs but taxed as partnerships. The IRS has not issued definitive rules on SE tax treatment for LLC members. However, generally:

• Active LLC members are often treated like general partners and pay SE tax on their full share of income.

• Passive members may be able to treat their income more like that of a limited partner, potentially avoiding SE tax on part of it.

Because of this ambiguity, it's essential to structure and document roles carefully—and work with a knowledgeable CPA.

Conclusion: Know Your Role, Know Your Taxes

The difference between being a general or limited partner goes beyond titles—it directly impacts how much tax you owe on your earnings. If you're actively involved in running the business, expect to pay self-employment tax on your income. If you're a passive investor, you may avoid it—unless you receive guaranteed payments for services.

Tax laws surrounding partnerships and SE tax can get complicated, especially for LLCs and hybrid arrangements. If you're entering a partnership or unsure how your role affects your tax liability, we strongly recommend consulting a qualified CPA to review your specific situation.

Have questions about partnership taxes?

Our team at Misty Newsome CPA LLC helps small business owners and service professionals make smart, tax-efficient decisions. Contact us today to schedule a consultation.