The first thing I told them was that this was incorrect. According to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and therefore should not be given a W-2.
This is apparently a common error. FYI, in every instance a CPA or CPA firm handled the accounting, payroll filing and reporting for the partnership or LLC.
In each of the occasions, the partner was actively involved in the daily operation of the business on a full-time basis (i.e. a Registered Physical Therapist providing physical therapy to patients, the manager of a fast-food franchise), and received a weekly “paycheck” from the business.
An employee receives “wages”, from which federal and state income tax, FICA (Social Security and Medicare) tax, and, depending on where you work, state unemployment and/or disability insurance is withheld. Wages are also subject to FUTA (federal unemployment) tax.
A partner can receive “guaranteed payments”. Guaranteed payments from a partnership are not subject to income tax, FICA or state unemployment and/or disability insurance withholding. If the guaranteed payments represent “net earnings from self-employment”, the partner will pay self-employment tax on Schedule SE as part of his annual Form 1040 filing. Guaranteed payments are not subject to federal unemployment tax. A partner receiving guaranteed payments should be making quarterly federal and state estimated tax payments.
If you are a partner who received guaranteed payments in 2006 and you receive a 2006 Form W-2 from the partnership you should go to the partnership’s accounting firm, tell them that they FU-ed, and show them this posting.