Andrew Duehren, The I.R.S. Tried to Stop This Tax Dodge. Scott Bessent Used It Anyway., N.Y. Times (Nov. 12, 2025) (quoting Walter D. Schwidetzky):
It was an easy and, by all accounts, legal way to avoid paying thousands, and potentially millions, in federal taxes.
Just set up an investment firm with the right legal structure, and the self-employment taxes that fund Social Security and Medicare could become largely optional.
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Among those who would benefit from an I.R.S. defeat is President Trump’s Treasury secretary, Scott Bessent, a former hedge fund owner and, since August, the acting commissioner of the I.R.S.
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Mr. Bessent’s decision to not pay the additional tax has now put him in the unusual spot of personally opposing — and having a personal stake in — how the I.R.S. interprets tax law. And since he took office, the Treasury and I.R.S. have backed away from developing regulations to address it.
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The limited partnership is an old and, for tax planners, reliable legal structure. While newer, more versatile types of business entities are available, including the limited liability company, the limited partnership has endured, experts say, largely because of an apparent carve-out in the tax code.
Generally speaking, Americans owe payroll taxes, as well as income taxes, on the money they make working. Most people split payroll taxes, which fund Medicare and Social Security, with their employers. Business owners and the self-employed, on the other hand, have to pay the full freight.
Except for limited partners. Under a 1977 law, limited partners do not necessarily owe self-employment taxes on their earnings. Only money categorized as “guaranteed payments,” which the firm owners can set for themselves, would be subject to those taxes.
This clause appeared to open up the possibility of significant tax savings for people like Mr. Bessent who channeled their earnings through a limited partnership. While the tax that funds Social Security applies only to earnings up to a limit, set at $176,100 this year, the Medicare tax is uncapped. The 2.9 percent Medicare tax rises to 3.8 percent for income over $200,000 for individuals. For investment managers raking in millions a year, even such a seemingly small tax could add up to millions of dollars in additional taxes every year.
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