When an unincorporated partner becomes a W-2 employee mid-year

[Belgarath]

So there is both k-1 income and W-2 income for the former partner. There seems to be some gray in this area. It seems clear that the compensation for the former partner is the sum of k-1 income and W-2 income. But, how is the K-1 income calculated? Do you just take the k-1, taking into account a PROPORTIONATE share of the common law employees' contribution (let's say 6 months for sake of illustration) or use some other method? Or to put it another way, it appears that another method might be acceptable, but maybe not...?

Any opinions welcome! Thanks.

[Peter Gulia]

Is your query about 2023? If so, has the former partner received her K-1 reporting her share of the partnership's items of income, deduction, and credit?

Might the tax preparer have already done the apportioning, including figuring the former partner's shares of items based on the portion of the year for which she was a partner?

[CuseFan]

Right, accountant will arrive at K1, from which you can derive the SECA deduction in coordination with W2 pay. Of course the contribution amount for the employee allocation is an expense against that K1, so the accountant may be on hold as well.

I think the question is, if that adjusted K1 is $100,000, for example, and say the W2 is $50,000, is any employer contribution then split 2/3 self-employed and deducted on 1040 with 1/3 a contribution for the employee W2? That also results in the aforementioned circular calculation as the contribution for the employee is an expense against the partner's K1.

I doubt there is any guidance out there and would agree that a proportionate allocation between partner and common law employee contributions is most appropriate. If the employer contribution is base on a percentage, then your calculations are easier as you start with employee allocation and work from there.

[Belgarath]

Gracias. And Peter, this is for 2024, looking ahead.