# How does tax work in a partnership?



## Hammerhead (24 Mar 2011)

Hey there,

As the title suggests, how does tax work in a partnership? Let's say for instance there are two people, can they split it by a percentage. 50/50?

I'm trying to get my head around it. I assume standard practice is to pay wages to all involved. I realise all income less expenses is taxable. So if they pay wages is it taxed again?

The story is, a friend of mine is in a partnership. Currently they take drawings from the account as their "wages". That isn't the right way to do it I assume? So I was telling him to figure out a reasonable wage and pay it into separate accounts and put a dual signature restriction on the business account.

The problem is one partner likes to draw more than the other yet the tax bill is 50/50 and he is unsure how it works himself.

Sorry to over confuse the question. I know how tax works based on one person I just can't figure out the partnership.

Thanks I'm advance.


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## BarMcc (24 Mar 2011)

Partners can split the profits anyway they want.  There is no required way to split profits as long as all profits are allocated to the partners.

Partners cannot take a "wage" from partnership as they are not legally seperate from the partnership.

Normally in a 50:50 agreement each partner takes a set weekly/monthly drawing by s/o or DD.  At the end of the year any balance of profits is allocated to partners 50:50.


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## cdaly (24 Mar 2011)

Generally in a partnership, there is an agreement between them on the percentage of profit each partner can draw down from the business. Each year, a set of accounts will need to be prepared for the partnership business and each partner will be taxed on their portion of the tax adjusted profit, even if they haven't drawn down their share of the profits from the business.  When the balance of any profits is known, it can then be split with the partners in the agreed percentage. 

In case you haven't done so, the partnership can be registered with Revenue using a form TR1 and they will allocate a tax number to the partnership. You will need to submit a tax return each year for the partnership (Form 1 Firms) which will include an extract of accounts for the partnership. The profit allocated to each of the partners will be included then in their own individual tax return. Any tax liability due will then be paid by each partner themselves. For accounts ending in 2010, any income tax liability will be due by 31 October 2011.


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## Hammerhead (24 Mar 2011)

Righteo, thanks for the replies.

Ok then, so they split the income in whatever way was ageed and should ideally use a standing order to "pay" themselves a reasonable "wage" into their own *personal* accounts. When I say "wage" I mean the idea of it not an actual wage.

Then at the end of the year they can split the balance in the same manner, kind of like a bonus let's say? Can they also leave that balance in for the business (will this get taxed again) or do they have to draw it down?

Finally starting to understand this stuff, it's quite easy when people take the time to explain it in plain English. Thanks again, much appreciated.


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## cdaly (24 Mar 2011)

Unfortunately you will be taxed on your share of the profit in full each year, even if you reinvest some of the profit back into the business.  When you do however drawn down money from the partnership that has already been taxed, you will not be taxed again. I would recommend that you sit down with a professional tax advisor or accountant, if you haven't already done so. It could save you money in the long run. The Revenue have very good information on their website. Use this link as a starting point http://www.revenue.ie/en/business/running/registering-tax.html. Best of luck


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## Gervan (24 Mar 2011)

In a partnership, as in a sole trader set up, the tax is on the profits, not on what the sole trader or each individual partner takes out of the business. What the partners draw is not an expense.


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## Paddy199 (29 Mar 2011)

You can take a wage and pay taxes etc on it. Its added back for the profit split calculation.


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## rm15 (6 Jan 2014)

*Partnership taking a wage*

Hi

My friend runs a partnership with her 2 sisters. They have a clothes shop and some days they will take a shift in the clothes shop and take a wage of £50 for the day worked. How does this need to be represented in their partnership tax return.

Does the amount paid to the partners go through as a salary expense or not?

Thanks


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## Paddy199 (6 Jan 2014)

It's not a partnership expense. 

For the partners profit split, it appears to be £50 for a day worked plus the agreed %. That's the way I would work it anyway.


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## vaoi (24 Oct 2014)

Hi, I have just come across this useful post and have further questions -  
1. can we allocate a different portion of partnership income from year to year to each partner?
2. how is the allocation of expenses applied? (this is from the point of view of filing for income tax)
Thanks.


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## Joe_90 (25 Oct 2014)

*Allocation of partnership profits*



vaoi said:


> 1. can we allocate a different portion of partnership income from year to year to each partner? * yes the allocation is based on the agreement between the partners.*
> 2. how is the allocation of expenses applied? (this is from the point of view of filing for income tax. * this is done while doing the accounts - if the partners generate turnover in different proportion then directly attributable expenses should be set against their turnover then the other overheads can be allocated in proportion to turnover.*



Joe


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## vaoi (27 Oct 2014)

Thanks Joe.


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## Ingrid (4 May 2016)

I wonder if anyone could help with my question. If partners have both drawn down money from the account beyond the profits for that year, ie Deposits relating to following years income, When is income tax due on that income?
Example - 
2015 Total Net Profit is 14K (50/50 split)
2015 Total Drawings is 24K (funded by 2016 deposit fee)

Is the income tax on the extra 10K drawn in 2015 due at the same time as the  14K profit income tax?

Also, how is this reflected in Form1? 

Thanks in advance!


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## Joe_90 (4 May 2016)

They are taxed on the profit of the business.

If they chose to take more than the profit that's their look out.

They fill in their share of the profit on the Form 11.

They fill in the details of the accounts on a Firms Form 1.


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