Definition of a Partnership

Partnerships are businesses formed between two or more individuals (partners). These partners are not shareholders instead share ownership of the partnership. Like S Corporations, partnerships are not taxed at the corporate level. Instead, the partners share the tax liability on their personal returns.

• A business formed as a partnership pays no income tax. Instead, the profits and losses are passed to the partners, who then pay the taxes. The partnership will report each partner's share of profit and loss on Schedule K-1 (Form 1065).
• As for S Corp owners, premiums paid towards benefits for partners are handled as post-tax contributions on corporate and personal tax returns.
• Partnerships must also identify any employees who are also family members of any partners.
• Partners are owners, not W-2 employees. They are subject to self-employment taxes, and will report Federal income as an individual on Form 1040.
• Partnerships may have W-2 employees. If so, the partnership is subject to normal Federal (Income, FICA, FUTA) and State employment taxes (Income, SUI, SDI, etc.) on wages paid to employees, and will file Forms 940 (FUTA Tax return) and 941 (Quarterly Return for Income and FICA taxes) for amounts withheld.
• Wages paid by a partnership in which two spouses the only partners (e.g., family business) to their children or parents are not subject to FUTA taxes.

For more information, see the IRS guide to partnerships.