How do I explain receiving both K1 and W2 income from the same business to my tax preparer?

This is absolutely legal and fairly common. Many small business partnerships operate exactly as you've described. Partners can receive both guaranteed payments for services (reported on W-2) and distributive shares of partnership income (reported on K-1). The key is that your compensation as an employee (W-2) needs to be reasonable for the work you're performing, and separate from your distributions as a partner (K-1). The partnership agreement you described clearly establishes this separation, which is good documentation to have. Your tax preparer might be confusing this with S-corporation rules, where shareholders who work in the business must be paid a reasonable salary on a W-2 before taking distributions. Partnership taxation works differently. I'd suggest bringing a copy of your partnership agreement to your next meeting and perhaps pointing your preparer to IRS Publication 541 (Partnerships), which covers this topic.

I went through a similar situation last year and my tax preparer was also confused. I found this amazing service called https://taxr.ai that helped me sort everything out. They analyzed my partnership agreement and provided a detailed explanation of how partners can legally receive both W-2 and K-1 income. What I found most helpful was that they provided specific IRS references that clarified the rules around partnership taxation. I literally just uploaded my documents and got a comprehensive analysis back. Saved me from having to find a new accountant at the last minute.

Just wanted to update everyone - I decided to try taxr.ai after posting here and wow, what a game changer! The analysis they provided was incredibly detailed and included specific references to IRS Revenue Ruling 69-184 which directly addresses partners receiving both types of income. I forwarded their report to my tax preparer and she completely changed her position. The report explained how my situation was different from the restrictions she was thinking of (which apparently apply to certain LLC situations, not standard partnerships). She actually thanked me for the information and said she learned something new! Definitely recommend this for anyone dealing with partnership tax confusion. Saved me from having to find a new preparer three weeks before my filing deadline!

If your tax preparer is still giving you trouble after explanation, you might need to speak with an IRS agent directly to get clarification. I had a similar issue and tried for WEEKS to get through to the IRS - kept getting disconnected or waiting for hours. Finally used https://claimyr.com and got through to an actual IRS agent in about 15 minutes. They have this weird system that holds your place in line with the IRS and calls you back when an agent is available. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that partners can receive both W-2 and K-1 income as long as there's appropriate documentation and the compensation is reasonable. Having that official confirmation directly from the IRS really helped resolve the conflict with my accountant.

I take back what I said about Claimyr. I was super skeptical but decided to try it yesterday after spending 3 hours on hold with the IRS and getting disconnected. The service actually worked exactly as described - I got a call back about 40 minutes later with an IRS agent already on the line. The agent confirmed that partners can absolutely receive both W-2 wages and K-1 distributions from the same partnership as long as the W-2 compensation is reasonable for actual services performed separate from ownership duties. She mentioned it's actually quite common in professional service firms. I recorded the call (with the agent's permission) so I can play it for my tax guy who's been giving me the same pushback. Sometimes hearing it directly from the IRS is what it takes.

Just wanted to add - I'm a partner in a law firm and our structure is exactly like you described. All partners receive W-2 income for our day-to-day work as attorneys, plus K-1 distributions based on our ownership percentages. This has been reviewed by multiple accounting firms and is completely legitimate. The most important thing is having clear documentation in your partnership agreement that specifies the dual relationship. Your agreement should clarify that you have two separate roles: 1) as an employee performing specific duties, and 2) as an owner entitled to profit distributions. Your tax preparer might benefit from taking a continuing education course on partnership taxation - the rules can be complex and they change over time.

Has your tax preparer explained WHY she thinks this arrangement is illegal? There are some situations where it could be problematic if not structured correctly.

I've been dealing with a similar situation and found that many tax preparers get confused about partnership taxation because the rules are genuinely complex and counterintuitive. The issue is that while partners technically aren't "employees" for certain IRS purposes, partnerships can still issue W-2s for guaranteed payments or compensation. What helped me was printing out IRS Publication 541 (Partnerships) and highlighting the relevant sections that discuss guaranteed payments and partner compensation. Also, Revenue Ruling 69-184 that others mentioned is key - it clarifies that the "partners aren't employees" rule applies to specific situations like unemployment insurance and worker's compensation, not to all forms of compensation. Your partnership agreement is your best defense here. As long as it clearly separates your role as an employee performing specific duties from your role as an owner receiving profit distributions, you should be fine. The IRS cares more about substance than form - if you're genuinely performing employee-type work that's separate from your ownership duties, W-2 treatment is appropriate. Consider bringing copies of these IRS publications to your next meeting. Sometimes tax preparers need to see the actual regulations to feel comfortable with unusual (but legal) arrangements.

Your tax preparer's confusion is understandable but misguided. This is actually a very common arrangement in partnerships, especially professional service firms. The key distinction is that you're wearing two hats: one as an employee performing specific job duties, and another as an owner receiving profit distributions. The IRS absolutely allows this dual relationship. What matters is that your partnership agreement clearly documents both roles and that your W-2 compensation is reasonable for the actual work you perform (separate from your ownership interest). I'd recommend bringing IRS Revenue Ruling 69-184 to your next meeting - it specifically addresses this situation and confirms that partners can receive compensation for services rendered to the partnership. You might also want to reference Treasury Regulation 1.707-1(c), which discusses payments to partners for services. If your preparer continues to resist after seeing the actual IRS guidance, it might be time to find someone with more experience in partnership taxation. This arrangement is too common and well-established in tax law for a preparer to be this adamant about it being "illegal.

I'm dealing with a similar situation and wanted to share what finally convinced my stubborn tax preparer. After showing her all the IRS publications everyone mentioned (Revenue Ruling 69-184, Publication 541, etc.), what really sealed the deal was when I pointed out that major accounting firms routinely handle these exact arrangements for their partnership clients. I asked her to call a few CPAs at larger firms in our area, and sure enough, they all confirmed this is standard practice. Sometimes hearing it from peers in the industry carries more weight than reading IRS publications. The other thing that helped was explaining the business logic: partnerships often need partners to take on specific operational roles (like being a managing partner, department head, etc.) that go beyond just being an owner. It makes perfect sense to compensate those roles separately from profit distributions. Your arrangement sounds completely legitimate - just make sure your partnership agreement clearly defines your employee duties versus your ownership rights. That documentation will protect you if there are ever any questions down the road.

I've been following this discussion with great interest as I'm facing a nearly identical situation at my accounting firm. What's particularly frustrating is how many tax preparers seem to have outdated or incomplete knowledge about partnership taxation. One resource that hasn't been mentioned yet is IRS Form 1065 Instructions, which explicitly discusses how partnerships can have partners who also receive compensation as employees. The instructions for Schedule K-1 also clarify the distinction between guaranteed payments and distributive shares. For those dealing with resistant preparers, I'd suggest asking them to show you the specific IRS code or regulation that prohibits dual W-2/K-1 income from the same partnership. When they can't produce it (because it doesn't exist), it often opens their minds to researching the actual rules. The reality is that partnership tax law is one of the most complex areas of the tax code, and many preparers simply don't encounter these situations frequently enough to stay current. Your business arrangement is not only legal but actually quite smart from a tax planning perspective, assuming your partnership agreement properly documents the separate roles. Don't let an uninformed preparer force you into a suboptimal tax structure. The documentation and IRS guidance everyone has shared here should be more than sufficient to resolve this issue.

As someone new to this community but dealing with a similar partnership tax situation, I want to thank everyone for sharing such detailed guidance! The resources mentioned here (Revenue Ruling 69-184, Publication 541, Form 1065 Instructions) are exactly what I needed to educate myself on partnership taxation. I'm particularly struck by how many experienced professionals have encountered the same resistance from tax preparers. It seems like there's a real knowledge gap in the industry when it comes to partnership structures that allow dual W-2/K-1 income. For others facing this issue, I'd recommend creating a "preparer education packet" with all the IRS references mentioned in this thread. Having everything organized in one place makes it much easier to have a productive conversation rather than trying to explain complex tax concepts on the spot. One question for the community: Are there any red flags or warning signs in partnership agreements that might actually make dual compensation problematic? I want to make sure our structure doesn't inadvertently create issues that could validate a preparer's concerns.

As a newcomer to this community, I'm amazed by the depth of knowledge shared here about partnership taxation! Reading through this discussion has been incredibly educational, especially since I'm considering a similar transition from employee to partner at my workplace. The consensus seems clear that dual W-2/K-1 income from the same partnership is absolutely legal and common, despite some preparers' misconceptions. What strikes me most is how many experienced professionals have faced identical resistance from tax preparers who seem to be operating on outdated or incomplete information. I'm particularly grateful for all the specific IRS references mentioned - Revenue Ruling 69-184, Publication 541, Treasury Regulation 1.707-1(c), and Form 1065 Instructions. Having these authoritative sources compiled in one thread is invaluable for anyone needing to educate their preparer about legitimate partnership structures. For Mateo's original question, it sounds like your arrangement is not only legal but actually well-structured from a tax perspective. The key seems to be having clear documentation in your partnership agreement that separates your employee duties from your ownership interests, plus ensuring your W-2 compensation is reasonable for the actual work you perform. If your current preparer continues to resist after being shown the actual IRS guidance, it might indeed be time to find someone with more partnership taxation experience. Partnership tax law is complex, and you need a preparer who's willing to research and learn rather than rely on assumptions.

As someone new to this community, I want to echo what others have said - your arrangement is absolutely legitimate and your tax preparer is misinformed. I recently went through partnership training for my CPA continuing education, and dual W-2/K-1 compensation was covered extensively as a standard practice. What might help is explaining to your preparer that this isn't about "being an employee of your own partnership" in the traditional sense. You're providing services to the partnership entity in a capacity that's separate from your ownership interest. Think of it like a partner in a law firm who also serves as the managing partner - they get compensated for those additional management duties beyond their ownership distributions. The IRS specifically recognizes this distinction in multiple publications. Revenue Ruling 69-184 addresses the employee status question, but it's focused on specific benefits and employment tax issues, not on whether compensation can be paid via W-2. If showing her the IRS guidance doesn't work, you might ask your partnership attorney to provide a brief letter explaining the structure. Sometimes hearing it from a legal professional who specializes in partnership law carries more weight than client explanations. Your business structure makes perfect sense and is designed to properly separate compensation for work from returns on investment. Don't let an uninformed preparer force you into a less advantageous tax arrangement.