Moving to a K-1. What do I need to know?

[thebigad]

I've been a W-2 employee of a partnership, but am now moving to a K-1. What do I need to know?

From reading here and online...

1. I assume hiring a CPA becomes an almost-necessity.

2. I pay estimated taxes quarterly, I believe.

3. I pay taxes later than usual.

What else? Any tips and tricks? Anything I should do in the 2017 tax year before I go K-1 for the 2018 tax year?

Interesting development, but unclear what it all means.

[Hayden]

I don't know why hiring a CPA would be a necessity. TurboTax handles a K-1 just fine. Many Bogleheads receive K-1s and can answer any questions you have. What did you want the CPA to do?

[Gill]

Not much different. You are now a partner rather than an employee and will receive a K-1 at the end of the year. Shouldn't be any reason you need a CPA - just plug the figures from the K-1 into your tax return. Yes, you will need to make quarterly estimated payments which is either four checks to the IRS or four debits to your checking account through EFTPS.gov. I would recommend the latter as it is much easier and can be scheduled a year in advance.
Gill

[thebigad]

I'm still learning, but I thought there are different considerations of deducting expenses now that previously could not be deducted (or that my employer would cover on my behalf and will no longer do so).

And I don't know what else changes in the K-1 scenario. I hear I will lose the dependant care savings account pre-tax contribution option. Is there some strategy to make up for it when you go K-1?

It's stuff like that I believe a CPA would advise on, and less so on the actual tax filing itself.

Thanks.

[fipt2030]

If you haven’t already, look into the availability of more tax deferred savings such as Solo 401K through K1

[thebigad]

If you haven’t already, look into the availability of more tax deferred savings such as Solo 401K through K1

I'm still going to be under the partnership's 401(k) plan, I'm told.

[Meg77]

I'm still learning, but I thought there are different considerations of deducting expenses now that previously could not be deducted (or that my employer would cover on my behalf and will no longer do so).

And I don't know what else changes in the K-1 scenario. I hear I will lose the dependant care savings account pre-tax contribution option. Is there some strategy to make up for it when you go K-1?

It's stuff like that I believe a CPA would advise on, and less so on the actual tax filing itself.

Thanks.

You should at least consult a CPA initially to develop a strategy and get your questions like the ones above answered. I have gotten various K1s (from investment partnerships not my employer) for several years and am a financial professional and have always done my own taxes. But I've discovered from conversations with my friends in our tax department that simply plugging in the K1 values is not necessarily enough (they have no vested interest in whether I file on my own since they can't/won't be doing my taxes either way). Apparently some K1s must be tracked or classified certain ways, some require the cost basis to be monitored each year or other actions that TurboTax won't track, etc. I'm not an expert, and as such I have recently engaged a tax preparer for the first time to begin with my 2017 tax filing.

PS I get all my K1s in Q1 in time to still file on time, though that is certainly not always the case.

[Jnick55]

First, congratulations. I went through the same when I was promoted to partner many years ago. I was worried about tax preparation for the first couple of years but then found that Turbotax was easy to use and worked just fine. If you have to make capital contributions to your firm to buy-in during your first few years, remember that those payments can be a heavy drain on cash in those years. Also, beware the false sense of wealth that results from not being subject to withholding. You are correct that you will make quarterly estimated tax payments instead of having income tax withheld from your pay. But you will probably base those estimated payments on your income tax liability for the most recently completed year. If your income jumps in your first year of partnership, your actual income tax liability at the end of your first year can significantly exceed the estimated amounts that you have been paying. The result will be a big tax bill at the end of that year to fund the difference. Partnership distributions tended to be heavily loaded toward year end, making a revolving line of credit helpful until I built sufficient wealth to be able to self-fund the fluctuations in partnership distributions throughout the year. Many business related expenses should become deductible now that you are a Schedule C filer. Also, if your partnership has offices in more than one state, you will probably need to make state income tax filings in each of those states. Again, I found that I was able to handle those state filings with Turbotax.

[grandmacassie]

DH went K-1 many years ago. One thing that hasn't been mentioned is that you not only have to make your quarterly income tax payments, you have to pay FICA (both sides!) and medicare taxes as part of that quarterly tax payment. I think both sides of FICA amounts to over 15%, so I hope you are getting a nice bump in your share of the business revenue. We always have had a CPA do our taxes and tell us what estimated payments should be. It's a little luxury that helps us sleep well at night.

[yukonjack]

I have received a K-1 for 5 years now and have yet to find a need for a CPA. Both Turbo Tax and H & R Block handle K-1s just fine. You are pretty much walked through the form. At the end of the process review the results closely for errors and omissions but otherwise if you are comfortable doing your taxes in the past I wouldn’t change anything for a K-1.

[Spirit Rider]

If you haven’t already, look into the availability of more tax deferred savings such as Solo 401K through K1

I'm still going to be under the partnership's 401(k) plan, I'm told.

This is correct. While the K-1 is considered self-employment, for the purposes of employer retirement plans, you are considered an employee and the partnership is the employer. Therefore, the 401k can only be adopted by the partnership and a partner can not adopt a one-participant 401k.

[soupcxan]

[deleted]

[Spirit Rider]

Yes, you will have to pay Self-Employment taxes, but that is only an extra 7.65% up to the Social Security maximum wage base (2017 = $127,200) and an extra 1.45% extra after that, but you will get to deduct 1/2 of the SE tax on your Form 1040 Line 27 and legitimate business expenses on your Schedule C.

You should do a spreadsheet of all the company benefits that you will not receive as a K-1 and will either have to pay for yourself or self-insure. Then make sure you are getting at least that premium in K-1 payments or you are losing money. Usually being made partner results in a substantial increase in net compensation, but the cynic in me always leaves out the possibility that the motive is to save on employee benefits costs.

[ivk5]

In addition to loss of many employee benefits, making quarterly estimated tax payments, non-resident state tax liability/reporting, and paying SE tax, one other change that may come as a surprise that i didn't see mentioned is NIIT...

Be aware of impact of timing of state tax payments if you are either bunching to alternate itemize/standard deductions in alternate years or at bottom/top edge of AMT (since not deductible under AMT). You can choose whether to prepay Q4 in December or not, and can also choose whether to pay safe harbor or full estimated liability. Side note but also make sure you do not overpay when you get refund of state taxes for year in which you did not get full benefit of deduction. Software sometimes screws this up - can be nontrivial to determine what portion of that year's payments generated a benefit and then providing a statement with return that reconciles to 1099-G amount.

(Not specific to becoming partner but just to note, may also be able to control timing of property taxes, 13 vs 11 mortgage payments, charitable deductions via DAF, etc for bunching or based on expected changes in marginal rate, eg edges of AMT or AMT bump zone.)

One other item to know that i didn't see mentioned. If you finance a partner capital contribution and pay interest yourself, that interest may be deductible. In my case it goes directly on my schedule E along with my partner earnings (separate line item) (reduces net amount subject to SE tax as well i believe?).

I'd be in favor of having a good tax preparer do your return at least for one year, then decide if you are comfortable doing it yourself with software once you see the result.

Personally i also find the glenn reeves excel1040 spreadsheet invaluable for simulations and tax planning (esp if you are in/near AMT). Took a little playing around to get it to match prior year as a baseline, but after that very easy to quickly model impact of different scenarios.

[thebigad]

Thanks, all. Based on the replies, I think I will get with a CPA at least initially. Seems like there is a lot of of smart moves to be made and I don't have the time or skillset to figure those out.

[fishmonger]

Thanks, all. Based on the replies, I think I will get with a CPA at least initially. Seems like there is a lot of of smart moves to be made and I don't have the time or skillset to figure those out.

Full disclosure, I was a CPA in a former life. I am in the minority on this board, but I think it would be worth your while to meet with a couple of CPAs (initial consulation is almost always free) to bounce a few questions off them. Then ask for a quote to prep your 2018 taxes. Depending on your situation, you may just say that it's worth your money to sleep well at night and not have to worry about it.

Most of these folks who say "just punch it into TurboTax" have no idea of the issues/potential ramifications of reporting incorrectly, good or bad. Only about 2% of 1040s are audited on any given year, so some may have been making mistakes all along and have no idea.

If it's a simple partnership you are a part of with minimal activity, that's fine. But if it's your main job, and there are ongoing issues, I think it's worth it to seek professional advice at least to start.