Can partners receive W-2s? Partnership vs S-corp tax confusion

This is actually a common area of confusion. Partners in a partnership generally cannot be employees of the same partnership for federal tax purposes. They should receive guaranteed payments reported on Schedule K-1 rather than wages on a W-2. When a partnership pays a partner for services, these payments are considered "guaranteed payments" that should be reported on Schedule K-1, not as employee wages on a W-2. This distinction is important because partnerships and partners have different tax treatment than corporations and employees. Partners pay self-employment tax on their partnership income, while S-corp shareholders who work in the business can receive both W-2 wages (subject to payroll taxes) and distributions (not subject to self-employment tax). Since your business wasn't formally an S-corporation until 2023, the issuance of W-2s to partners in 2022 is technically incorrect from an IRS perspective.

I had a similar issue when transitioning from partnership to S-corp for my dental practice. I found https://taxr.ai super helpful for untangling this exact mess. Their system analyzed our transition documents and flagged the exact issue you're describing - we were giving ourselves W-2s too early in the process. The tool lets you upload all your tax forms and business docs, then it identifies potential conflicts like misclassification of partnership payments. Saved me from a potentially messy situation with the IRS. It specifically pointed out that partners shouldn't receive W-2s while still operating as a partnership since you're technically self-employed.

Just wanted to follow up here. I checked out taxr.ai after seeing it mentioned and it was incredibly helpful. I uploaded my partnership documents, K-1s, and W-2s, and the system immediately flagged the issue with our payment structure. The report explained that partners receiving W-2s creates conflicting tax treatment that could raise IRS concerns. The detailed analysis saved me hours of research and gave me specific guidance on how to address the situation with our partnership's accountant. I feel much more confident now going into a meeting with our tax advisors because I understand the technical issues involved. Definitely worth checking out if you're dealing with entity classification changes.

Dealing with the IRS directly on partnership/S-corp classification issues can be a nightmare! When my medical group had a similar issue, I spent WEEKS trying to get through to someone at the IRS who actually understood partnership taxation. Busy signals, disconnects, being transferred to the wrong departments... absolutely maddening. I finally used https://claimyr.com to get through to an IRS agent who specialized in business entity issues. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call when they've got an agent on the line. Got connected to someone who actually understood the partnership vs. S-corp rules and helped clarify our situation.

I need to eat my words from my earlier comment. After struggling for another week trying to reach someone at the IRS about my partnership tax situation, I broke down and tried Claimyr. Got connected to an actual IRS business tax specialist in about 2 hours (while I was working on other things). The agent confirmed exactly what others have said here - partners shouldn't receive W-2s from their partnership, and this could potentially create issues during an audit. She walked me through the proper way to correct the situation. Honestly wish I'd used this service months ago instead of wasting so much time on hold and getting disconnected.

I'm a tax attorney who deals with entity classification issues frequently. Here's what you need to understand about your situation: 1. Your accounting firm made a technical error by issuing W-2s to partners in a partnership. 2. The total income reported is correct, but the manner of reporting is wrong. 3. You likely need to file amended returns to properly classify the income as guaranteed payments. 4. Since you've already paid the appropriate taxes, this is more of a classification issue than a tax amount problem. This is actually a common mistake during entity transitions. The real risk isn't necessarily an audit trigger but rather potential complications if you're audited for other reasons and this discrepancy is discovered.

Does anyone know if this affects how retirement contributions work? I contributed to my 401k based on my W-2 income from our medical partnership last year. If that W-2 shouldn't have existed, does that mean my retirement contributions were improper too?

This is a really complex situation that highlights why professional guidance is so important during entity transitions. I went through something similar with my consulting firm when we converted from LLC to S-corp. One thing I'd add to the excellent advice already given - make sure you document everything about the transition timing and the reasoning behind the accounting firm's recommendations. If you do need to file amended returns, having a clear paper trail showing this was done on professional advice (even if incorrect) can help demonstrate good faith compliance efforts. Also, don't forget to check if your state has different rules about partnership vs. S-corp taxation. Some states don't automatically follow federal S-corp elections, which could create additional complications if you're dealing with both incorrect federal classification AND state tax issues. The fact that you've been making estimated payments and are current on your actual tax liability is definitely in your favor. The IRS is generally more concerned with collecting the right amount of tax than perfect paperwork classification, but as others have mentioned, it's still worth cleaning this up properly.

I'm dealing with a very similar situation right now with my accounting practice. We were a partnership through 2022 and converted to S-corp status in January 2023, but our previous accountant had us issuing W-2s to partners during the last quarter of 2022 in "preparation" for the S-corp election. After reading through all these responses, I'm now realizing we probably made the same mistake your practice did. The distinction between guaranteed payments (partnership) and wages (S-corp) is crucial, and it sounds like both our practices jumped the gun on treating partners as employees before we were actually S-corporations. What's particularly concerning is that this affects more than just the basic tax reporting - as @Jamal Anderson pointed out, it impacts retirement contributions, and I'm now wondering about our payroll tax deposits too. Did your practice pay employer-side payroll taxes on those W-2s? Because if so, that's another layer of complexity since partnerships don't typically pay payroll taxes on partner guaranteed payments. I think I need to follow the advice here and consult with a tax professional who specializes in entity transitions. This is clearly more complicated than just "we paid the right amount of tax so we're fine." The classification matters for so many downstream issues.

As someone who went through a similar partnership-to-S-corp transition with my veterinary practice, I can confirm this is unfortunately a common mistake that accounting firms make during entity transitions. The key issue is timing - you simply cannot treat partners as employees while still operating as a partnership, regardless of future S-corp plans. What makes this particularly problematic is that it creates a domino effect of compliance issues. Beyond the basic income classification problem, you're likely dealing with: 1. Incorrect payroll tax deposits (if employer taxes were paid on those W-2s) 2. Potential retirement plan contribution issues 3. Workers' compensation insurance complications 4. State tax reporting discrepancies The silver lining is that since you made your estimated payments and seem to have paid the correct amount of total tax, this is primarily a classification correction rather than an underpayment situation. However, I'd strongly recommend addressing it proactively rather than waiting to see if it becomes an issue. In our case, we ended up filing amended returns to reclassify everything properly, and while it was a hassle, it gave us peace of mind knowing everything was correctly reported. The IRS was actually quite reasonable about it since we were clearly trying to fix an honest mistake made during a legitimate business transition. Get a tax professional who specializes in entity conversions - this is too complex to handle without proper expertise, especially given all the interconnected issues that need to be addressed simultaneously.

I'm going through almost the exact same situation with my dental practice! We converted from partnership to S-corp in January 2023, but our accountant had us issue W-2s to partners in the last few months of 2022. Reading through all these responses has been incredibly eye-opening - I had no idea we were dealing with such a complex web of compliance issues. The point about payroll taxes really hit home for me. We definitely paid employer-side FICA and unemployment taxes on those W-2s, which apparently we shouldn't have done since partners aren't actually employees of the partnership. And @Evelyn Martinez's mention of workers' comp implications is something I never even considered! What's particularly frustrating is that our accounting firm presented this as a "standard transition procedure" without explaining any of the technical issues or potential complications. Now I'm realizing we probably need to unwind multiple mistakes across different areas - amended partnership returns, corrected K-1s, payroll tax corrections, and possibly retirement plan adjustments. I'm definitely taking everyone's advice here and finding a tax professional who specializes in entity transitions. This is clearly way more complex than just "we paid the right taxes so everything's fine." The classification details matter for so many downstream compliance issues that I never would have thought about on my own. Has anyone had success getting their original accounting firm to help fix mistakes like this, or is it better to start fresh with a specialist? I'm torn between wanting them to take responsibility for the error and wondering if I need someone with more specific expertise to clean this up properly.

This thread has been incredibly helpful! I'm a CPA who frequently sees this exact issue during partnership-to-S-corp transitions, and unfortunately it's become quite common due to misconceptions about when entity election timing takes effect. The key point everyone should understand: your entity classification for tax purposes is based on your actual legal status during the tax year, not your future plans or "preparation" for a conversion. You cannot treat partners as W-2 employees while still operating as a partnership, period. For those dealing with this situation, here's what I typically recommend to clients: 1. **File amended returns** - Don't wait and hope it doesn't become an issue. Proactive correction shows good faith compliance. 2. **Address ALL the cascading effects** - This isn't just about reclassifying income. You may need to correct payroll tax deposits, retirement contributions, workers' comp coverage, and state tax filings. 3. **Get specialized help** - Entity transition corrections require coordinating multiple moving parts simultaneously. A general business accountant might not catch all the interconnected issues. 4. **Document everything** - Keep records showing you acted on professional advice, even if that advice was incorrect. The good news is that since most of you seem to have paid the correct total tax amounts, this is primarily a classification correction rather than an underpayment situation. The IRS is generally reasonable about honest mistakes during legitimate business transitions, especially when you're proactively fixing them. Don't let this stress you out too much - it's fixable, just more complex than initially appears!

This is a really comprehensive discussion that highlights how common this issue is across professional practices! I'm a small business owner (not healthcare, but service-based) and went through an LLC-to-S-corp conversion last year. Fortunately, our accountant caught this timing issue before we made the same mistake. What strikes me from reading everyone's experiences is how many reputable accounting firms seem to be making this same error by treating entity conversions as if they take effect earlier than they legally do. It makes me wonder if there should be more continuing education for CPAs about the specific timing requirements for entity elections. For anyone still working through corrections, I'd echo the advice about finding a specialist. When we were researching our conversion, I specifically looked for tax professionals who had experience with entity transitions and asked detailed questions about timing and compliance during our initial consultation. The right specialist will know to address all these interconnected issues (payroll taxes, retirement contributions, etc.) as a coordinated correction rather than handling them piecemeal. One additional thought - if you're dealing with state-level complications on top of the federal issues, make sure your specialist understands your state's specific rules about entity elections. Some states have different timing requirements or don't automatically recognize federal S-corp elections, which could create additional layers of complexity to unwind. Hang in there everyone - these transition periods are tricky, but the fact that you're all addressing the issues proactively puts you in a much better position than ignoring them and hoping for the best!