How to take a salary when acting as the managing partner in a partnership

What you're looking for is called a "guaranteed payment" in partnership tax terms. This is how active partners receive compensation for services they provide to the partnership before profit distributions happen. Guaranteed payments are reported on your Schedule K-1 (Form 1065) and then flow to your personal tax return. You're right that you won't receive a W-2 since partners aren't employees of their partnership. These payments are subject to self-employment tax (Medicare and Social Security). The partnership will deduct these guaranteed payments as a business expense, which reduces the overall partnership profit that gets allocated between both of you according to your profit-sharing agreement. The tax treatment is similar to a salary, but the mechanism is different.

I went through this exact situation last year with my fitness business partner. I was managing our gym while he provided the funding. I spent HOURS researching before I found taxr.ai (https://taxr.ai) which analyzed our partnership agreement and explained exactly how guaranteed payments work. The site had this really good explanation tool that showed me how to properly document these payments, what forms we needed, and how it would affect both our tax situations. It even created a tax calendar for my quarterly payments so I wouldn't miss deadlines. Best part was being able to upload our draft partnership agreement and getting specific feedback about the compensation section.

I need to follow up about my experience with taxr.ai after being skeptical in my last comment. I decided to give it a try with our brewing company partnership agreement, and I'm genuinely impressed. The system caught a major issue with how we were planning to structure my partner's draw that would have created unnecessary tax liability. The document analysis showed exactly how to properly categorize his operational payments as guaranteed payments while protecting my investor status. It even generated monthly bookkeeping entries we could use to track everything correctly throughout the year. Definitely saved us from making some rookie partnership tax mistakes that would have been painful to fix later.

Another option is to talk directly with an IRS agent about this. I know that sounds terrifying, but I was in a similar situation and had specific questions about guaranteed payments. After wasting days trying to get through on the IRS line, I used https://claimyr.com to get a callback from the IRS within 20 minutes (there's a video showing how it works here: https://youtu.be/_kiP6q8DX5c). I was able to ask all my specific questions about how to document the guaranteed payments, tax implications, and filing requirements. The agent even emailed me specific publications that addressed my situation. It was shockingly helpful and gave me confidence that we were setting things up correctly from day one.

I have to eat my words about Claimyr. After my skeptical comment, I was desperate enough to try it for our partnership tax issue. We had conflicting advice from two different accountants about guaranteed payments vs. distributions, and I needed an official answer. The service got me connected to an IRS tax specialist within about 15 minutes. The agent walked me through exactly how guaranteed payments should be documented in our partnership agreement AND how they needed to be reported on our 1065 and subsequent K-1s. She even emailed me some internal guidance they use. I've been doing business for 20 years and this was shockingly the most straightforward interaction I've ever had with the IRS.

One important thing to consider is that guaranteed payments are deductible by the partnership but they don't reduce the self-employment income of the receiving partner. So while the partnership gets a deduction, you're still paying self-employment tax on that money. Many partnerships instead structure things with a higher profit allocation percentage to the working partner plus distributions rather than guaranteed payments. This can sometimes be more tax efficient depending on your specific situation and profit levels.

Quick note on bookkeeping: Make sure your partnership agreement clearly defines these guaranteed payments and that your accounting system tracks them separately from partner distributions. We messed this up in our law firm and it created a NIGHTMARE at tax time. Also, don't forget that as the working partner receiving guaranteed payments, you'll need to make quarterly estimated tax payments. The partnership itself doesn't withhold anything, so it's 100% on you to set aside money for taxes!

Another option you could consider is forming an S-Corp instead of a partnership. That would allow you to be both an owner AND an employee. You could take a reasonable W-2 salary (saving on SE tax for amounts above that salary) and then take distributions for the rest of your share. Obviously there are other factors to consider with entity selection, but I switched from a partnership to an S-Corp specifically because of this salary issue and it's saved me thousands in self-employment taxes.

I went through this exact situation when I started my consulting partnership. The guaranteed payment route that Keisha mentioned is definitely the right approach - it's specifically designed for situations like yours where one partner is doing the operational work. One thing I'd add is to make sure your partnership agreement specifies that these guaranteed payments are made regardless of partnership profitability. This protects your monthly income even if the business has a slow period. We learned this the hard way when our first quarter was rough and my partner questioned whether I should still get paid. Also, consider setting up a separate business checking account just for your guaranteed payments. It makes the bookkeeping much cleaner and helps with quarterly tax planning. I transfer 35% of each payment to a tax savings account immediately - better to overestimate than get hit with penalties. The IRS has some good examples in Publication 541 that show exactly how guaranteed payments work in different scenarios. Worth reading before you finalize your partnership agreement!