How do partners avoid SE Tax?

Question

How do partnerships decrease or eliminate SE tax?? Are both allowed to be limited partners? Is the only way to create an LLC and 2 S-corps, one for each partner??

Who's the smart one that knows this answer?

Michael Plaks · Answer

@Patrick J.

Partnerships can somewhat control SE tax via guaranteed payments, a mechanism similar to reasonable salary paid by S-corps.

However, like most tax strategies, it is case-by-case and has to be considered together with all related pieces. While it might reduce SE tax, it can also reduce QBI deduction and trigger other side effects. Does not always lead to tax savings.

Ashish Acharya · Answer

Yes SE tax blocker such as an S-Corp can be used but you have to have certain level of income for this to make sense. You will have to pay yourself salary from the Corp so your won’t be avoiding the Tax just by getting the s-crop, especially when you don’t have bigger operation and decent amount of revenue. You have to pay the FICA tax on your S-Corp wages which is basically the SE tax that you would have paid with the partnership.

Just putting yourself as limited partners doesn’t mean you will avoid SE taxes.

How do partners avoid SE Tax?

2 Replies