Partner treated as employee

[JBP]

I have a new client -- a partnership split evenly between 3 members.

Partner A was paid wages all of 2018 (received a W2).
There were no other employees. Partner A received wages only -- no benefits.
None of the three partners received guaranteed payments or took any money out of the partnership, other than the wages to Partner A.
The partnership has a loss for the year.

Any suggestions on how to handle partner wages on their 1065?
--If reported on line 9 "Salaries and wages other than to partners," how would I acknowledge that it was paid to a partner?
--If reported on line 10 "Guaranteed payments to partners," how would I re-classify the wages as guaranteed payment? How would payroll tax be handled?

I will advise a change in compensation method for 2019.

Thanks in advance for your time and shared wisdom.

[TaxGuyBill]

A Partner can not be an employee, so the proper way is to amend the W-2 and payroll forms to $0. Then add it to Guaranteed Wages.

[kathyc2]

Bill is correct on the way it should have been. If you back out the paychecks, the amount going to GP would be net checks partner received. There would be no payroll tax expense (matching FICA, etc.) on P/L. The matching expense and the employee withholding taxes paid should show as an asset.

Depending on circumstances and if all 3 partners agree to it, I may be inclined not fix the 2018 error, but still correct paychecks to date for 2019.

[TaxGuyBill]

I agree that if everybody agrees to it (and know it is incorrect and will fix it for 2019), I may just 'look the other way' and leave 2018 alone.

However, I'm not sure if I agree with Kathy for how to handle if it you do decide to fix it. The withheld FICA taxes were essentially paid to the employee/Partner, but the employer was going to forward that to the Treasury. So I would include that in Guaranteed Wages, and on the balance sheet show it as a temporary loan to the Partnership (the Partnership claimed it paid the employee the gross amount). I may also include the matching employer FICA as Guaranteed Payments as well (and a loan to the Partnership), as the Partnership paid that in behalf of the employee/Partner in 2018.