Can you issue a 1099 to a partner for specific work?

[mamabryant]

We have a partnership where there are no guaranteed payments. Are we able to issue a 1099 to each partner based on specific contract related work that was performed, and the remaining gain of the partnership be partnership distributions? Or does all income have to be reported/filed as distributions? The partnership has hired multiple independent contractors for the same type of work that the partners have done sometimes. Is it possible for a partnership to hire the partners themselves as independent contractors? Or does that violate tax law?

Regardless of the answer, where do we report partner distributions on the 1065? Are these payments deductible at all if they aren't guaranteed payments?

[RobertB4444]

Partners in a partnership pay taxes on all of the profits that a partnership makes.  Then the money that has been taxed can either be given to the partners or kept in the business to build the business up and help keep it going.

If it is given to the partners then it is entered as distributions.  That reduces each partner's investment in the partnership.  If it is kept in the partnership then it increases each partner's investment in the partnership.  Either way the partners will pay taxes on the full amount earned by the partnership.  

Guaranteed payments are payments that the partnership is contractually required to pay to the partners.  If you don't have any of these don't enter them.

You can pay the partners as contract labor if they worked as contractors for the partnership and if they were paid for it.  The 1099 income paid to that partner will reduce every partner's share equally.  So if there are 4 partners and one of them is paid $2000 on a 1099 it will reduce every partner's share by $500.  

Additionally, any partner receiving payments on a 1099 would be required to pay self employment tax on those payments on their personal return.

You are going to report distributions in the partner information section.  When you enter the information for each partner there will be a section that asks for information about money contributed by each partner to the partnership and money that was distributed to each partner.  Enter the distributions there and they will carry over to the K1s.  They will not result in a tax deduction, however.

@mamabryant 

[mamabryant]

Thank you! Super helpful. If the partners are both active participants, they will need to pay self employment taxes on their distributions as well as anything they are paid out as a 1099 from the partnership, correct? Is there a benefit to hiring the partners for contract work, from a tax perspective, vs having all of the work they perform just be done as a partner vs a contractor? If they are hired for some particular work as a 1099, does that help reduce the overall "income of the business" (like you said it reduced all partners shares) in a way that actually changes or improves the tax situation for the partners? Or does it net out the same since the partners are paying self employment tax on everything they "earn" as a partner or contractor, anyway?

[RobertB4444]

If both partners are active and paying self-employment tax on their earnings then the only reason to 1099 them would be to make sure that the particular partner receiving the 1099 gets a bigger amount of money than they would have otherwise.  Which is good if they're doing the contract job for you.  

@mamabryant