Generally, a partnership does not make quarterly estimated income tax payments for its partners. The partnership files an annual federal information return, while each partner may need to make individual estimated tax payments based on that partner’s share of partnership income and other income.
That distinction matters. Form 1065 reports the partnership’s activity, Schedule K-1 reports each partner’s share, and Form 1040-ES is generally used by an individual partner to calculate and pay estimated federal tax. Special rules can apply to foreign partners, certain entity partners, and other circumstances.
What Does the Partnership File?
A partnership generally files Form 1065, U.S. Return of Partnership Income. Form 1065 is an annual information return reporting the partnership’s income, deductions, gains, losses, and other federal tax items. In the usual pass-through arrangement, the partnership itself does not pay federal income tax on that income.
The partnership gives each partner a Schedule K-1 showing that partner’s distributive share of relevant tax items. A partner generally must report those items on the partner’s own federal return even when the partnership does not distribute an equivalent amount of cash. Schedule K-3 may also be required when international tax items must be reported.
Who Makes the Quarterly Estimated Tax Payments?
Individual partners are treated as self-employed rather than employees when they perform services for the partnership. A partnership therefore generally does not withhold federal income tax from a domestic partner’s distributive share in the way an employer withholds tax from wages. Instead, an individual partner may need to make estimated payments directly to the IRS.
The IRS explains that partners may need to use Form 1040-ES, Estimated Tax for Individuals, to figure and pay estimated tax. Form 1040 and Form 1040-SR are annual income tax returns; they are not the quarterly estimated-payment forms.
When Does a Partner Need to Pay Estimated Tax?
Under the IRS’s general rule, an individual may need to make estimated payments when both of the following are true:
- The individual expects to owe at least $1,000 in federal tax for the year after subtracting withholding and refundable credits; and
- The individual’s withholding and refundable credits are expected to be less than the smaller of 90% of the current year’s tax or 100% of the prior year’s tax. The prior-year percentage generally becomes 110% for certain higher-income taxpayers.
These are general federal rules, not a calculation for every partner. A partner’s other income, withholding, credits, filing status, prior-year return, and changes in partnership income can all affect the required payment. The IRS provides additional details in its estimated-tax guidance for individuals.
How Are Partnership Estimated Tax Payments Calculated?
A partner normally begins with the expected federal tax consequences of the partner’s distributive share, guaranteed payments, and other taxable income. The Form 1040-ES worksheet can then be used to estimate the partner’s total annual federal tax and the amount not covered by withholding or credits.
Estimated payments are generally divided into four installments due during the year and shortly after year-end. The familiar dates fall in April, June, September, and January for calendar-year taxpayers, but weekends, holidays, special rules, or disaster relief can change a deadline. Taxpayers should confirm the applicable year’s dates on the current Form 1040-ES.
Equal quarterly payments are not always the best calculation when partnership income is seasonal or changes substantially during the year. The annualized-income installment method may sometimes better match payments to when income was earned, although the calculation and recordkeeping are more involved.
Does Every Partner Owe Self-Employment Tax?
No. Self-employment tax treatment depends on the partner’s status and the character of the income. The IRS states that a general partner’s distributive share of ordinary trade or business income and guaranteed payments may be included in net earnings from self-employment. A qualifying limited partner generally does not include the limited partner’s distributive share for this purpose but may owe self-employment tax on guaranteed payments for services.
LLC members taxed as partners can present additional classification questions. A partner should not assume that every amount appearing on Schedule K-1 is automatically subject to self-employment tax, or that none of it is.
Important Withholding Exceptions
The general rule that partnerships do not withhold tax for partners has important exceptions. For example, a domestic or foreign partnership with effectively connected taxable income allocable to a foreign partner may have withholding and payment obligations under Internal Revenue Code Section 1446. The IRS provides separate partnership-withholding guidance for these situations.
Other specialized withholding and reporting rules may apply depending on the partner, the income, and transactions involving a partnership interest. Those rules should be analyzed separately from an individual domestic partner’s ordinary Form 1040-ES obligation.
Common Partnership Estimated-Tax Problems
- Waiting for the final Schedule K-1 before considering estimated-tax obligations;
- Assuming no tax is due because the partnership retained cash rather than making a distribution;
- Using Form 1040 instead of Form 1040-ES to calculate quarterly payments;
- Ignoring guaranteed payments or self-employment tax;
- Failing to adjust estimates after a substantial change in partnership income; and
- Missing a payment deadline or applying a payment to the wrong tax year.
An underpayment can result in interest and an estimated-tax penalty even when the taxpayer pays the remaining balance with a timely filed annual return. If the IRS has already assessed a penalty, eligibility for penalty abatement depends on the penalty involved and the taxpayer’s circumstances.
When Legal Help May Be Appropriate
Routine projection and return preparation are commonly handled by a CPA or other qualified tax preparer. A tax attorney may become important when estimated-payment problems are connected to an IRS examination, an assessed penalty, an unpaid balance, missing returns, partnership-level proceedings, or a dispute over how federal tax rules apply.
Margolies Law Office represents individuals and businesses in federal IRS matters. If missed partnership filings or individual returns are part of the problem, review our information about unfiled tax returns. To discuss an existing IRS dispute or collection issue, contact Margolies Law Office or call (469) 626-7760.
This article provides general information about federal tax procedure and is not legal or tax advice for a particular partnership or partner. Reviewed for federal tax accuracy by Andrew Margolies, Esq.
