In May of 2016, the IRS released new regulations confirming that owners of a partnership cannot be considered employees of a wholly owned, disregarded entity for tax purposes.
Why is this important?
It has been a long standing rule that persons with ownership in a partnership are not treated as employees for purposes of payroll taxes and retirement plans. These new regulations clarify that partners who are employees of a disregarded entity owned by the partnership have the same status as their ownership in the partnership, and fall under different rules for retirement plans and other fringe benefit plans like cafeteria and HSA plans. This is important because their personal compensation from the disregarded entity needs to come in the form of a guaranteed payment as self-employment income instead of a regular paycheck with a W-2 at the end of the year.
The IRS further explained that the holding of a prior Revenue Ruling from 1969 is still in effect. That ruling states that:
- Bona fide members of a partnership are not employees of the partnership for purposes or Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and income tax withholding, and;
- A partner who devotes time and energy in conducting the partnership’s trade or business, or who provides services to the partnership as an independent contractor, is considered self-employed and is not an employee.
If changes are needed, companies have until the later of August 1, 2016 or the beginning of the first benefit plan year after May 4, 2016 to make the necessary revisions.
If you have any questions as to how this may impact your or your company, reach out to us online by clicking here, or call 513-241-8313 to speak with a member