When Is a Partner in a Partnership a 1099 Worker?

When the individual production activity of a partner is outside his/her capacity as a member of the partnership, the partnership has 2 options:

1. Designate the production income to the partner, and have the partner treat the expenses as unreimbursed partner expenses (UPE).
2. Manage the partner as a 1099 independent contractor for the individual production.

Unreimbursed Partner Expenses

As a partner in a partnership, you typically can't subtract any of the partnership expenses on your individual income tax return-- the partnership must cover and deduct its own business expenses.

However if your partnership arrangement or business policy forces you as an individual partner to pay for expenses out of pocket, without any compensation available, then you can deduct the business expenses completely on your individual income tax return as UPE.

Due to the fact that the UPE is a trade or business expense, it likewise lowers your self-employment tax.

Treatment as a 1099 Independent Contractor

The tax code is clear on how this works. IRC Section 707( a)( 1) states:

If a partner participates in a deal with a partnership other than in his capacity as a member of such partnership, the deal shall, except as otherwise offered in this section, be thought about as taking place between the partnership and one who is not a partner.

Hence, under this treatment, you would treat that activity as independent contractor activity and report the income to the partner on internal revenue service Form 1099-NEC, Nonemployee Compensation.

The partnership agreement need to clearly specify how it will treat a partner's individual production. If you have concerns on how to treat one of your partners, please do not hesitate to