The Internal Revenue Service has released final and temporary regulations on the self-employment tax treatment of partners in a partnership that owns a disregarded entity and whether they can participate in employee benefit plans.
The regulations take effect Wednesday. The Tax Code states that, except as otherwise provided, a business entity that has a single owner and is not a corporation is disregarded as an entity separate from its owner, thus making it a “disregarded entity.” However, the Tax Code also says a disregarded entity is treated as a corporation for purposes of employment taxes. Therefore, the disregarded entity, rather than the owner, is considered to be the employer of the entity’s employees for purposes of employment taxes.
While the Tax Code treats a disregarded entity as a corporation for employment tax purposes, the rule does not apply for self-employment tax purposes. After setting forth this general rule, the regulation applies this rule in the context of a single individual owner by saying that the owner of an entity that is treated in the same manner as a sole proprietorship is subject to tax on self-employment income. The regulation also includes an example that specifically illustrates the mechanics of the rule. In the example, the disregarded entity is subject to employment tax with respect to employees of the disregarded entity. The individual owner, however, is subject to self-employment tax on the net earnings from self-employment resulting from the disregarded entity’s activities.
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