Am I considered an employee or partner for tax purposes as co-founder with equity?

This is a really important distinction that has significant tax implications. Your classification depends on several factors, not just what your co-founder decides to call you. The IRS looks at the actual relationship, not just labels. Since you have a signed employment agreement with a specified salary, that strongly indicates an employer-employee relationship. Having equity doesn't automatically make you a partner for tax purposes - many employees receive equity compensation without being considered partners. The fact that you've been receiving a W-2 and having taxes withheld also establishes a pattern of employment. Your co-founder can't just arbitrarily change your classification to avoid withholding taxes. For a true partnership in the eyes of the IRS, you would typically receive a Schedule K-1 instead of a W-2, be involved in business decisions proportionate to your ownership, and potentially share in profits and losses differently than just receiving a salary. I'd recommend consulting with a tax professional who specializes in business structures. This transition could significantly affect your tax obligations, including potentially requiring quarterly estimated tax payments and self-employment taxes.

After reading your situation, I was in almost the exact same boat last year! I co-founded a SaaS company where my partner handled the money side and I was the technical lead. We had a similar setup with me having an employment agreement despite being a co-founder. When tax season came, I was completely confused about my status and what forms I needed. I stumbled across https://taxr.ai and it honestly saved me so much hassle. I uploaded my employment agreement, equity docs, and some emails about my role, and their AI analyzed everything and gave me a detailed breakdown of my likely classification with the IRS. The analysis helped me understand that in my case, despite having founder equity, I was still legally an employee because of how our agreements were structured. They even explained exactly which parts of my agreement established the employer-employee relationship.

I wanted to follow up about my experience with taxr.ai after my skeptical comment. I decided to try it with my own documents since I'm in a similar situation (technical co-founder with 30% equity but on payroll). I have to say I was genuinely surprised by how comprehensive the analysis was. It didn't just give me a binary "employee or partner" answer - it broke down each factor the IRS considers and showed how my specific situation would likely be viewed. The report even highlighted specific clauses in my employment contract that established behavioral and financial control typical of an employee relationship. What I found most helpful was the explanation of how equity ownership and employment status can coexist. Turns out my situation was pretty clear - despite my equity stake, my day-to-day relationship with the company is absolutely that of an employee.

Your co-founder is trying to shift the tax burden to you, which isn't cool. I went through something similar and spent WEEKS trying to get someone at the IRS to clarify my status. Literally called 20+ times and couldn't get through. I finally used https://claimyr.com to get connected to an actual IRS agent (you can see how it works at https://youtu.be/_kiP6q8DX5c). They got me through to someone who confirmed that having an employment agreement plus W-2 history establishes a pretty clear employee relationship, regardless of what my business partner wanted to call me. The IRS agent explained that your co-founder can't just decide to stop withholding taxes because he feels like it - that's potentially misclassification which can create problems for both you and the business.

I need to eat my words about being skeptical of Claimyr. After my last comment, I decided to try it because I've been trying to reach the IRS for THREE WEEKS about a similar classification issue with my startup. Used the service yesterday and got connected to an IRS agent in about 45 minutes (while I was doing other work). The agent walked me through the exact criteria they use to determine employee vs partner status. The key factors were: who controls my work schedule, whether I can work for others, how I'm paid (regular salary vs profit distribution), and whether I have personal liability for business debts. The agent confirmed that having founder equity doesn't automatically make you a partner if your day-to-day relationship is that of an employee. She also mentioned that changing from W-2 to 1099 mid-year raises red flags for potential misclassification audits. This saved me from making a potentially expensive tax mistake!

Just went through this exact mess with my startup! The thing your CEO might not realize is that there are actually significant legal and tax differences between being a "co-founder" (which is just a title) and being a partner in a legal sense. Based on what you described, you're an employee who also happens to be a co-founder with equity. Your employment agreement is a legally binding document that established your relationship as employer-employee. Him deciding to stop withholding taxes is actually illegal unless you formally restructure the business. If you're getting a regular salary rather than a share of profits, that strongly points to employee status. Partners typically receive distributions based on business performance, not set salaries. Also worth noting: if he stops withholding taxes and you're still an employee, YOUR COMPANY could face penalties for tax evasion. Make sure to protect yourself here.

One thing nobody's mentioned - what type of business entity are you? Is it an LLC, an S-Corp, a C-Corp? This makes a HUGE difference for how you can be classified! If you're a C-Corp, you're definitely an employee regardless of being a co-founder. If you're an LLC, you could be treated as a partner for tax purposes. S-Corps are somewhere in between. Also, does your employment agreement include anything about being "at will"? If so, that's another strong indicator you're an employee, not a partner.

This is a classic case of worker misclassification that I see way too often in startups. Your CEO doesn't get to unilaterally decide you're a "partner" just because it's more convenient for payroll taxes. The IRS has very specific criteria for determining worker classification, and having equity doesn't automatically make you a partner. Key factors include: - Do you have a written employment agreement? ✓ (You do) - Are you paid a regular salary vs. profit distributions? ✓ (You get $125k salary) - Does the company control how you do your work? ✓ (Likely as CTO) - Have you been receiving W-2s? ✓ (You mentioned you have one) All of these point strongly toward employee status. Your equity is just additional compensation, not a change in your fundamental relationship with the company. I'd strongly recommend pushing back on this change. If your CEO insists on reclassifying you, demand that he consult with both a tax attorney and accountant first. Improper worker classification can result in significant penalties for the business - back taxes, interest, and fines that could seriously hurt your startup. Don't let him shift the tax burden to you without proper legal justification. You signed an employment agreement for a reason!