What are the tax implications of switching from W-2 to K-1 during the same year?

roboyang — Thu, 06 Jun 2019 15:54:35 GMT

I am due to make partner at my firm this year around the middle of September. Currently, I am on a W-2, but after making partner, my income will be changed to a K-1.

1) Are there any special tax considerations I need to think about?

2) Do I pay quarterly taxes for just the 4th quarter starting from Sept 1st? Do I need to pay the 3rd quarter's taxes too if I make partner before Sept 15th? (3rd quarters tax due date)

3) How do I avoid paying double taxes for the part of September that I will still be on a W-2?

Thanks in advance!

There are many issues here and probably too many to detai...

Rick19744 — Thu, 06 Jun 2019 15:54:37 GMT

There are many issues here and probably too many to detail, but I will provide an overview:

There will not be any double tax impact. I am sure that your partnership agreement is that upon admission or exit, the allocation is per day per unit.
As a partner, you are now self-employed. This means that you will need to make quarterly estimated tax payments.
I would also assume that you will be provided with either a guaranteed payment or distributions to cover your tax impact. If you are receiving a guaranteed payment, this is the downfall for many individuals. They forget that no taxes are taken out and that this guaranteed payment is subject to self-employment tax AND income tax. Set aside $$ so you are not caught short.
Additionally, as a partner, probably most fringe benefits that you are now receiving tax-free will no longer be tax-free. These will be subject to tax. Discuss this with someone at the Company so you understand the impact to you here.
The IRS has a safe harbor for estimated tax purposes. I have attached a link below to the 2017 form 2210 Underpayment Penalty form. I would recommend that for your 4th quarter estimated tax payment you pay in enough to cover a safe harbor; either the 100% or 110% if you are in that AGI bracket.
Finally, it is VERY important that you maintain a basis schedule of your interest in the partnership. If your K-1 section L is marked "tax basis" then you should be good to go. Anything else you need to maintain the basis schedule. A link to the 2017 form 1065 K-1 is below.

.https://www.irs.gov/pub/irs-pdf/i2210.pdf

https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

topic What are the tax implications of switching from W-2 to K-1 during the same year? in After you file

What are the tax implications of switching from W-2 to K-1 during the same year?

There are many issues here and probably too many to detai...