The definition of “limited partner” for purposes of the self-employment tax exclusion hinges on a partner’s management and control activities, not a state law label, the 2nd U.S. Circuit Court of Appeals held. The decision comes a month after another circuit court pivoted on the meaning of limited partner. (Soroban Capital Partners LP v. Commissioner, 2026 WL 2751819, 9/17/2026)

Individuals are generally subject to federal tax on their net earnings from self-employment, with proceeds used to fund Social Security and Medicare. However, IRC § 1402(a)(13) provides that limited partners may exclude their distributive share of income from a partnership from their self-employment net earnings.

Multiple circuit courts have been asked to weigh in on when a partner is a limited partner for purposes of this exclusion. The disputes have centered on whether individual partners are evading the tax by relying on state limited partner designations, while playing an active role in partnerships.

To dig deeper, visit the original article on the Thomson Reuters blog.