How do I properly handle General Partnership Tax Filing for our new entertainment business?

My friend and I just started a live entertainment business together as general partners. We recently landed our first contract that will bring in about $7,500 by the end of the year. After covering our initial expenses, we'll have roughly $4,000 left in our new business account. We're planning to keep this money in the business for future expenses rather than taking it out as personal distributions. I know general partnerships are pass-through entities not taxed at the business level. Since we're equal partners (50/50), I'm wondering if at tax time we should each claim $2,000 (half of the profits) as personal income on our tax returns, even though we're leaving the money in the business account? Also, my partner will be performing at our gigs alongside other performers who'll be paid as independent contractors with 1099s. We've agreed she'll receive the same performance rate as the others. Do I need to issue her a W9/1099 for her performance pay to properly deduct those expenses? Does that even make sense given she's an owner and not technically an employee or contractor? I've got an appointment with a tax preparer coming up soon, but wanted to get some understanding of this before I go. Thanks for any guidance!

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19 comments

Ellie Simpson

•8M

Yes, you'll each need to report your share of partnership income regardless of whether you take distributions or leave the money in the business. Partnerships file Form 1065 and issue Schedule K-1s to each partner showing their share of income (or losses). For your situation, assuming equal 50/50 ownership and no special allocations in your partnership agreement, you'd each report approximately $2,000 on your personal tax returns. This happens even though you're reinvesting the money in the business rather than taking distributions. The IRS calls this "phantom income" - you're taxed on your share of profits whether or not you physically receive the money. Regarding your partner who performs: No, you don't issue a 1099 to partners for services performed in their capacity as a partner. Their compensation is already factored into their distributive share of partnership income. However, you should document this arrangement in your partnership agreement to clearly specify if her performance pay is a guaranteed payment or part of her distributive share. Make sure you have a written partnership agreement that spells out how profits, losses, draws, and partner compensation will be handled. Bring this to your tax preparer appointment - they'll help you set up proper bookkeeping to track these arrangements correctly.

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Ellie Simpson

•8M

You have two options for handling partner compensation. First, you can treat it as a "guaranteed payment" which is essentially compensation for services rendered by a partner. This is deductible by the partnership and taxable to the partner as ordinary income (and subject to self-employment tax). This would reduce the partnership profit before the 50/50 split. Alternatively, you could simply account for it through special allocations in your partnership agreement, effectively giving that partner a larger share of profits to compensate for their performance work. This would be reflected on Schedule K-1. Either way, definitely document this in your partnership agreement and consistently apply the method you choose. Your tax preparer can help set up the right accounting structure to track this properly.

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Raúl Mora

•8M

I started using https://taxr.ai for my partnership taxes last year after struggling with similar questions. Their system analyzed our operating agreement and bookkeeping setup then explained exactly how to handle partner compensation situations like yours. What was great is they showed me how to properly document these arrangements to avoid future issues with the IRS. Since your partner is both an owner and performer, they helped me understand when to use guaranteed payments versus distributive shares - something that can actually impact your overall tax efficiency. They also provided templates for documenting these decisions properly in partnership minutes.

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Raúl Mora

•8M

It does work with QuickBooks - they can analyze your existing QB file and help you set up the right accounts to track partner activities properly. They actually recommended specific account structures for tracking guaranteed payments vs regular distributions. They review your actual partnership documents and transactions, not just generic advice. You upload your partnership agreement, bookkeeping files, and other documents, and their system flags specific issues based on your situation. For instance, they identified a problem with how we were tracking partner draws vs guaranteed payments that would have caused issues during an audit.

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Evelyn Kim

•8M

I tried https://taxr.ai after seeing it mentioned here and I'm honestly impressed. I uploaded our partnership agreement and some bank statements, and it immediately flagged issues with how we were handling partner compensation. What was really valuable was the personalized guidance on structuring guaranteed payments for my partner who also works in the business. It showed us how to properly document these decisions and even provided templates for partnership meeting minutes to formalize these arrangements. Our previous accountant never explained any of this! The software also made it clear when partner payments should be treated as guaranteed payments versus just distributions of profit. This ended up saving us quite a bit on self-employment taxes. Definitely worth checking out before your tax appointment.

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Diego Fisher

•8M

If you're having trouble reaching your tax preparer or need to talk to the IRS directly about partnership questions, try https://claimyr.com - saved me hours of hold time. I had complex questions about partner compensation that my preparer couldn't answer definitively, so I needed to speak with the IRS directly. Used their service and got connected to an agent in about 15 minutes instead of the 2+ hours I spent on previous attempts. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Basically they navigate the IRS phone tree for you and call you when an agent is on the line. I was skeptical at first but it actually worked perfectly.

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Diego Fisher

•8M

It uses a system that continuously redials and navigates the IRS phone tree until it gets through to an agent. Once there's an actual human on the line, it calls your phone and connects you directly to that agent. It's basically like having someone sit there and redial for hours so you don't have to. There's no special access or anything suspicious - they're just using technology to handle the frustrating part of the process. It worked great when I needed clarification on guaranteed payments vs distributive shares for partners who work in the business. The IRS agent I spoke with was actually really helpful once I finally got through.

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Lincoln Ramiro

•8M

Ok I have to eat my words. After dismissing Claimyr I decided to try it anyway out of desperation - had been trying to reach the IRS for WEEKS about partnership tax questions. It actually worked exactly as described. Got connected to an IRS agent in about 20 minutes. The agent confirmed that for partners who actively work in the business, we should be using guaranteed payments (reported on Box 4 of the K-1) rather than trying to issue 1099s. She explained that while these are deductible business expenses for the partnership, they're still subject to self-employment tax for the receiving partner. Honestly shocked this service worked so well. Saved me from making a classification error that would have caused problems during tax filing. Sometimes you need to hear directly from the IRS to get definitive answers, especially with partnership questions that have multiple possible approaches.

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Faith Kingston

•8M

Just went through this exact situation last year. Make sure you have your partnership agreement in writing! Our tax preparer said this was the most important document for determining how partner compensation should be handled. Also, keep in mind that Schedule K-1 income is subject to self-employment tax for general partners. So both of you will owe the full 15.3% FICA taxes on your share of partnership profits, not just income tax. This surprised us our first year.

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Faith Kingston

•8M

You should specifically include language about "guaranteed payments" for services performed by partners. This would clearly state that your partner receives $X per performance, regardless of the partnership's profitability, as compensation for services rendered in their capacity as a partner. You should also include how profits and losses will be allocated after accounting for these guaranteed payments. In your case, it would specify that after paying all performers (including your partner) and other business expenses, the remaining profits are split 50/50. Having this clearly documented will make your tax filings much more straightforward and defensible if ever questioned by the IRS.

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