Key Takeaways:
- Partners are self-employed, not employees. No W-2 wages for partners.
- SE tax rate: 15.3% (12.4% Social Security + 2.9% Medicare)
- Additional 0.9% Medicare above $200,000 (single) or $250,000 (MFJ)
- General partners pay SE tax on distributive share AND guaranteed payments
- Limited partners: SE tax only on guaranteed payments (generally)
- 2023 Soroban decision: Functional analysis test may apply to “limited partners”
- LLC members: Classification depends on level of participation
You check your Schedule K-1. Box 14a shows $150,000 of net earnings from self-employment. That’s roughly $23,000 in self-employment tax before you even calculate income tax.
SE tax hits partnerships differently than it hits corporations. Partners aren’t employees. They can’t receive W-2 wages. Instead, they pay self-employment tax on their share of partnership income.
But not all partners pay SE tax on everything. Limited partners have historically enjoyed an exclusion. LLC members occupy uncertain territory. And a recent Tax Court decision changed the analysis for many partnerships.
This guide explains who pays SE tax, how much, and what planning opportunities exist.
Table of Contents
Self-Employment Tax Basics
Self-employment tax funds Social Security and Medicare for people who don’t have traditional employer-employee relationships.
Employees pay 7.65% of wages (6.2% Social Security + 1.45% Medicare). Employers match with another 7.65%. Together: 15.3%.
Self-employed individuals pay both halves. That’s the 15.3% SE tax rate.
2026 SE Tax Rates
| Component | Rate | Applies To |
|---|---|---|
| Social Security | 12.4% | Earnings up to wage base (~$176,100 for 2026*) |
| Medicare | 2.9% | All self-employment earnings |
| Additional Medicare | 0.9% | Earnings above $200,000 (single) / $250,000 (MFJ) |
*Exact 2026 wage base announced by Social Security Administration
For high-earning partners, the math adds up. Someone with $300,000 in self-employment income pays:
- $21,836 on the first $176,100 (15.3%)
- $4,693 on the next $123,900 (2.9% + 0.9% above $200K threshold)
- Total: approximately $26,529 in SE tax
That’s before federal and state income tax.
Partners Are Not Employees
This is fundamental. Partners cannot receive W-2 wages from the partnership.
IRS guidance is clear: Partners are considered self-employed when working for the partnership. The partnership doesn’t withhold or pay employment taxes for partners. Partners must handle their own SE tax through estimated quarterly payments.
What this means practically:
- No FICA withholding from partner draws
- No employer matching contribution
- No payroll tax returns showing partner wages
- Partners file Schedule SE with their Form 1040
- Partners make quarterly estimated payments
The distinction matters because partners often think of their draws as “salary.” They’re not. Draws are distributions of partnership income. Guaranteed payments provide guaranteed income but still aren’t W-2 wages.
General Partners: Full SE Tax Exposure
General partners face SE tax on their entire distributive share of partnership ordinary income.
What’s Subject to SE Tax
For general partners:
- Distributive share of partnership ordinary income (Box 1 on K-1)
- Guaranteed payments for services (Box 4a on K-1)
- Net earnings from self-employment (Box 14a on K-1)
The partnership calculates net earnings from self-employment and reports it in Box 14a. General partners report this on Schedule SE.
What’s NOT Subject to SE Tax
Even for general partners, certain items escape SE tax:
- Interest income
- Dividends
- Rental income (generally)
- Capital gains
- Gambling earnings
- Sales of property
These items don’t constitute “trade or business” earnings under IRC Section 1402.
Example: Partnership ordinary business income: $200,000 Partnership interest income: $10,000 Partnership capital gain: $50,000
General partner owns 40%:
- Subject to SE tax: $80,000 (40% of $200,000 business income)
- Not subject to SE tax: $4,000 interest + $20,000 capital gain
Limited Partners: The Statutory Exception
Section 1402(a)(13) provides that limited partners do NOT include their distributive share of partnership income in self-employment income.
Only guaranteed payments for services are subject to SE tax for limited partners.
The Original Intent
Congress created this exception because limited partners are supposed to be passive investors. They contribute capital but don’t materially participate in business operations. They’re more like investors than workers.
For years, limited partners structured around this. A partner with minimal involvement could receive significant partnership income free of SE tax.
Requirements for Limited Partner Status
The statute itself doesn’t define “limited partner.” For state-law limited partnerships:
- Limited partner status is determined by state law
- Limited partners have limited liability
- Limited partners typically don’t participate in management
But what about LLC members? LLCs have members, not partners. Can LLC members claim limited partner status for SE tax purposes?
This ambiguity persisted for decades.
The Soroban Decision: Everything Changed
In 2023, the Tax Court issued Soroban Capital Partners LP v. Commissioner, fundamentally changing how limited partner status is determined for SE tax purposes.
What Happened
Soroban was a hedge fund organized as a limited partnership. Managing partners claimed their distributive share was exempt from SE tax because they were technically “limited partners” under the partnership agreement.
The IRS disagreed. The Tax Court agreed with the IRS.
The Functional Analysis Test
The court held that being designated a “limited partner” on paper isn’t enough. Courts must apply a functional analysis to determine if someone actually qualifies for the Section 1402(a)(13) exception.
Factors considered:
- Authority to contract on behalf of the partnership
- Performance of services for the partnership
- Participation in management decisions
- Economic risk of loss
- Character of the partner’s role
If a partner actively participates in management and performs significant services, they don’t qualify for the limited partner exception regardless of their title.
Impact on Planning
Post-Soroban, partners can’t rely solely on being called “limited partners” to avoid SE tax. The functional analysis test applies.
Who’s still protected:
- Truly passive investors who only contribute capital
- Limited partners who genuinely don’t participate in operations
Who’s NOT protected:
- “Limited partners” who actively manage the business
- Fund managers labeled as limited partners but running day-to-day operations
- Anyone whose role is functionally that of a general partner
LLC Members: The Uncertain Middle Ground
LLC members face the most uncertainty regarding SE tax.
The Problem
Section 1402(a)(13) exempts “limited partners.” LLCs have “members,” not partners. Does the limited partner exception apply to LLC members?
The IRS’s position: In 1997, the IRS proposed regulations to clarify. Those regulations were never finalized. Congress blocked funding for IRS to finalize them.
For over 25 years, LLC members operated in uncertainty.
Post-Soroban Analysis
The Soroban functional test provides guidance. Apply it to LLC members:
Manager-managed LLC (passive member)
- Member provides capital only
- Member doesn’t participate in management
- Member doesn’t perform services
- Strong argument for limited partner treatment
Member-managed LLC
- All members participate in management
- Members likely don’t qualify for exception
- SE tax likely applies
Service provider member
- Member provides professional services (attorney, accountant, consultant)
- Almost certainly subject to SE tax
- Regardless of LLC structure
Safe Positions vs. Aggressive Positions
| Structure | SE Tax Position | Risk Level |
|---|---|---|
| General partner | Pay SE tax on distributive share | Required |
| True limited partner (passive) | Exempt per Section 1402(a)(13) | Low risk |
| Active “limited partner” | May owe SE tax (Soroban) | Medium risk |
| Manager-managed LLC (non-manager member) | Possibly exempt | Medium risk |
| Member-managed LLC member | Likely owes SE tax | Low risk |
| Service provider (any structure) | Likely owes SE tax | Low risk |
Calculating SE Tax on Partnership Income
Here’s how to calculate self-employment tax on partnership income:
Step 1: Determine Net Earnings
Start with Box 14a from your Schedule K-1: Net earnings (loss) from self-employment.
This number already accounts for what the partnership determined should be subject to SE tax.
Step 2: Apply the 92.35% Adjustment
Multiply net SE earnings by 92.35%.
Why? This adjustment matches what employees experience. Employees don’t pay FICA on the employer’s share of FICA. Similarly, self-employed individuals effectively get to exclude half of SE tax from the SE tax calculation.
Example: Net SE earnings: $100,000 Adjusted: $100,000 × 92.35% = $92,350
Step 3: Calculate Social Security Tax
Apply 12.4% to adjusted earnings up to the wage base.
If adjusted earnings exceed the wage base, Social Security tax stops at that point.
Example (2026 wage base ~$176,100): Adjusted earnings: $92,350 Social Security tax: $92,350 × 12.4% = $11,451
Step 4: Calculate Medicare Tax
Apply 2.9% to all adjusted earnings. No cap.
Example: Medicare tax: $92,350 × 2.9% = $2,678
Step 5: Calculate Additional Medicare (If Applicable)
If combined self-employment income plus wages exceeds $200,000 (single) or $250,000 (MFJ), apply additional 0.9% Medicare.
Example (single filer, no wages): $92,350 is below $200,000 threshold Additional Medicare: $0
Step 6: Total SE Tax
Add Social Security + Medicare + Additional Medicare
Example total: $11,451 + $2,678 + $0 = $14,129
Step 7: Deduct Half on Form 1040
You can deduct 50% of SE tax paid on Form 1040 Schedule 1.
Example deduction: $14,129 × 50% = $7,065 deduction
This reduces adjusted gross income and taxable income.
Estimated Tax Payment Requirements
Partners receive no withholding. The partnership doesn’t deduct taxes from distributions.
Partners must make quarterly estimated payments covering:
- Federal income tax on partnership income
- Self-employment tax
- Any state income tax obligations
2026 Estimated Payment Deadlines
| Quarter | Payment Due Date |
|---|---|
| Q1 (Jan-Mar) | April 15, 2026 |
| Q2 (Apr-May) | June 15, 2026 |
| Q3 (Jun-Aug) | September 15, 2026 |
| Q4 (Sep-Dec) | January 15, 2027 |
Calculating Estimates
Safe harbor options:
- Pay 100% of prior year total tax (110% if AGI exceeded $150,000)
- Pay 90% of current year actual tax
Missing estimates triggers underpayment penalties. Partnership income fluctuates, making accurate estimates challenging.
Strategies to Manage SE Tax
Strategy 1: S-Corporation Election
LLCs and partnerships can elect S-Corp taxation. This changes how owners receive income.
Under S-Corp election:
- Owner-employees receive W-2 wages (subject to payroll tax)
- Remaining profits distribute without SE tax
Example: LLC earns $200,000.
As partnership: Partner pays SE tax on $200,000 (roughly $28,000)
As S-Corp: Owner takes $80,000 W-2 salary, remaining $120,000 as distribution. SE/payroll tax only on $80,000.
Potential savings: Thousands annually.
The S-Corp election makes sense when income consistently exceeds $75,000-100,000 and reasonable salary requirements can be met.
Strategy 2: Proper Partner Classification
If you’re genuinely a passive investor, document your limited involvement:
- No management participation
- No services performed
- Capital contribution only
- Written records of limited role
Post-Soroban, documentation supporting passive status becomes more important.
Strategy 3: Multiple Entity Structures
Some partnerships create tiered structures where:
- Management company (taxed as S-Corp) employs managers
- Operating partnership has passive investors
This separates active service income from passive investment returns.
Complex structure. Requires professional guidance. Not appropriate for everyone.
Strategy 4: Retirement Contributions
Contributions to retirement plans reduce taxable income but NOT self-employment income (SE tax is calculated before retirement deductions).
However, retirement contributions remain valuable for overall tax reduction.
Strategy 5: Review Annually
Partner circumstances change. SE tax planning should be part of annual review:
- Did your role in the partnership change?
- Does S-Corp election now make sense?
- Are you properly classified as general vs. limited?
Frequently Asked Questions
Are all partners subject to self-employment tax?
General partners pay SE tax on their distributive share and guaranteed payments. Limited partners historically pay SE tax only on guaranteed payments. However, the 2023 Soroban decision applies a functional analysis test, and “limited partners” who actively participate in management may owe SE tax on distributive share.
What is the self-employment tax rate for 2026?
15.3% (12.4% Social Security + 2.9% Medicare) up to the Social Security wage base (~$176,100), then 2.9% Medicare on amounts above. An additional 0.9% Medicare applies above $200,000 (single) / $250,000 (MFJ).
Do LLC members pay self-employment tax?
It depends on participation level. Members actively involved in management likely pay SE tax on their share. Truly passive members may argue for limited partner treatment, but this is a gray area. The Soroban decision’s functional test provides guidance.
How did the Soroban case change SE tax rules?
The Tax Court ruled that limited partner status for SE tax purposes depends on functional analysis, not just the partner’s title. Partners actively participating in management and performing services may owe SE tax regardless of being labeled “limited partners.”
Can partners receive W-2 wages?
No. Partners are self-employed, not employees. They cannot receive W-2 wages from the partnership. However, if the partnership elects S-Corp taxation, owner-employees can receive W-2 wages from the S-Corp.
Where is self-employment income reported on Schedule K-1?
Box 14a shows net earnings (loss) from self-employment. This amount is reported on Schedule SE of Form 1040.
SE Tax Isn’t Going Away
Partnership SE tax creates substantial liability for active partners. A partner earning $200,000 faces roughly $25,000-30,000 in SE tax alone.
Planning matters. Whether through proper classification, entity restructuring, or S-Corp elections, opportunities exist to manage this tax legally.
The key is understanding your specific situation. Are you truly passive? Do you perform services? Would S-Corp election work? These questions have different answers for different partnerships.
SDO CPA works with partners navigating these exact decisions. We analyze your role, income levels, and planning opportunities to minimize SE tax within legal bounds. Contact us to discuss your situation.