Self-employment tax rulings put partner status to the test

Self-employment (SE) tax may look straightforward on the surface: it generally combines a 12.4% Social Security tax and a 2.9% Medicare tax, calculated on net earnings from self-employment (generally 92.35% of net profit) and subject to applicable wage-base and additional-Medicare-tax thresholds. But even a few hundred dollars of side income or a Schedule K-1 (Form 1065) reporting a limited-partner interest can complicate the analysis.

The rules for sole proprietors are steady. For partners, appellate decisions in August and September have changed the landscape.

The $400 test runs on net earnings for sole proprietors

Is the $400 threshold based on gross income or net earnings from self-employment? Net earnings, and the gap between the two, is wider than clients expect. Net earnings are typically 92.35% of net profit after allowable business expenses, so a client with $430 of net profit on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), lands at $397 and stays under the line. At $400 or more, the client files Schedule SE (Form 1040), Self-Employment Tax.

Does income from leasing equipment escape SE tax the way rent from a building does? Not automatically. The rental exclusion in §1402(a)(1) covers real estate and personal property leased with it. Leasing an airplane or other personal property for profit, with continuity and regularity, may be a trade or business. And does the self-employed health insurance deduction lower SE tax? No. The §162(l) deduction doesn't reduce net earnings from self-employment, for sole proprietors or for partners.

For partners, a checked box doesn’t settle it

General partners are the simpler case. Do two law firm partners need a salary or guaranteed payment before SE tax applies? No. Their distributive shares of the firm's ordinary income are SE earnings whether or not the money is distributed.

Limited partners take more work. If each 50% member of a limited liability company (LLC) is marked as a limited partner on Schedule K-1, is that enough to exclude their distributive shares from SE tax? The IRS says no when they manage the business or perform substantial services. The box reports the partner’s designation, not whether the federal SE tax exclusion applies. The §1402(a)(13) exception turns on whether the partner acts more like a general partner, including whether they can bind the business by contract.

The courts are still drawing that line. On Aug. 12, 2026, the Fifth Circuit withdrew its January opinion in Sirius Solutions, L.L.L.P. v. Commissioner and, in K Alain, L.L.L.P. v. Commissioner, held that a limited partner is one who plays no significant role in managing or running the business. On Sept. 17, the Second Circuit affirmed the U.S. Tax Court in Soroban Capital Partners LP v. Commissioner, requiring limited liability and no part in running, managing or controlling the business. Neither ruling settles the treatment of ordinary LLC members, so confirm each case's status before relying on the ruling.

Can a Chief Counsel Advice memorandum carry the position instead? Not as precedent. Like private letter rulings, these memoranda fall under §6110. They show how the IRS thinks, but the return position needs the code, regulations, published guidance or case law behind it. The IRS also proposed regulations in 1997 that generally would have denied limited-partner status to partners who participated in the business for more than 500 hours during the tax year, but those regulations were never finalized.

Guaranteed payments follow the entitlement

Is a limited partner who receives a guaranteed payment for services taxed on that payment only, or on the distributive share too? The partner is taxed on the payment only, provided they qualify as a limited partner in the first place. So what makes a monthly payment "guaranteed"? Entitlement. A fixed amount the partnership owes even when income falls short points to a guaranteed payment under §707(c).

An advance against expected profits, reconciled through distributions and the capital account, points to a distribution. Payment frequency doesn't decide it. Document the arrangement in the partnership or operating agreement, a written resolution and the books. A cash shortage can delay a fixed payment without changing its character, but an amount that moves with available profits starts to look like a distribution. Two related answers save cleanup later.

Are health insurance premiums the partnership pays or reimburses for a partner treated as guaranteed payments? Yes, when the premiums are paid for services as a partner. Can a partner receive Form W-2, Wage and Tax Statement? No. Bona fide partners, general or limited, are treated as self-employed for services they perform as partners.

Two starting points

For a sole proprietor, SE tax starts with arithmetic. For a partner, it starts with what the person does all day and what the agreement says they're owed. With the case law still developing, note in the file which authority you relied on and the date you checked it.

Want a closer look at how these rules apply to partners and self-employed taxpayers? Join NATP’s Nov. 20 Latest Guidance for Self-Employment Taxes and Partners webinar for practical guidance on current SE tax issues. The webinar is also available on demand.