Partners May Not Be Employees

Article Highlights:

  • Partner Employee Issue

  • Self-employment Tax

If your partnership has been treating you and other partners as employees of a disregarded entity owned by the partnership so the partners can participate in employee benefit plans and receive other employee benefits, you’d better read this. Tax regulations (1) issued by the IRS take aim at this practice and were written to put a stop to it.

Background: A disregarded entity is treated as a corporation (2) for the purposes of employment taxes. Therefore, the disregarded entity, rather than the owner, is considered to be the employer of the entity's employees for the purposes of employment taxes. However, the owner is not treated as an employee and instead pays self-employment tax on the net earnings from self-employment resulting from the disregarded entity's activities.

At one time the regulations did not include an example where the disregarded entity is owned by a partnership, and because of that some taxpayers incorrectly interpreted the regulations to permit partners to participate in certain tax-favored employee benefit plans, which is contrary to the IRS’s intention.

The IRS and the Treasury noted that regulations did not create a distinction between a disregarded entity owned by an individual (a sole proprietorship) and a disregarded entity owned by a partnership in the application of the self-employment tax rule. The IRS has long held (3) that:

  1. A bona fide member of a partnership is not an employee of the partnership, and

  2. A partner who devotes time and energy to 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.

To resolve this issue, the IRS issued regulations modifying the original regulations to clarify the rule that an entity disregarded for self-employment tax purposes applies to partners in the same way that it applies to a sole proprietor owner. Accordingly, the partners are subject to the same self-employment tax rules as partners in a partnership that does not own a disregarded entity.

Self-employment (SE) tax consists of Social Security and Medicare taxes and is similar to the Social Security and Medicare (FICA) taxes withheld from most worker’s wages. An employee, through their withholding taxes, pays half of the FICA taxes, and their employer pays the other half. However, a self-employed person is responsible for paying 100% of the SE tax, and does so by figuring the SE tax on Schedule SE and including the form with their Form 1040 or 1040-SR. The self-employed individual can deduct the employer-equivalent portion of their SE tax in figuring their adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes. A self-employed individual will generally need to make estimated tax payments throughout the year to cover their income and SE tax liabilities.

If this issue affects you, your partnership, and a disregarded entity owned by the partnership and you have questions, please give this office a call.

(1)Reg. Sec. 301.7701-2T
(2)Reg. Sec.301.7701-2(c)(2)(iv)(B)
(3)Rev. Rul. 69-184

Share this article...

Want tax & accounting tips and insights?

Sign up for our newsletter.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .
I consent to receive SMS messages

Title: Accounting / Tax Manager 

We are seeking an Accounting/Tax Manager to join our team! You will lead and manage multiple operations of the tax practice area and deliver quality tax services that will increase the firm’s reputation. You will oversee the work of accountants, review financial statements, and prepare reports. Schedule: Monday to Friday. 

Job Type: Full-time. 

Interested parties please call 214-646-0300.  

Duties and Responsibilities: 

  • Manage and Prepare tax returns for over 2,000 individuals, businesses, non-profits and estates 

  • Contact clients to obtain tax documents 

  • Review tax returns with clients 

  • Provide basic tax planning/solutions services to clients 

  • Accounting/Bookkeeping for firm clients in various accounting software (QBO, QBD, Intacct, Xero, Wave, Zoho Books, BQE Core, etc...) 

  • Other administrative tasks when necessary: 

  • Plan and schedule appointments and events 

  • Greet and assist onsite guests 

  • Answer inbound telephone calls 

  • Draft correspondences and other formal documents 

  • Develop and implement organized filing systems 

  • Manage requests from website and social media management company 

Qualifications: 

  • Tax preparation experience is required 

  • Experience with Lacerte / Drake Tax software is required 

  • QuickBooks experience is required 

  • Previous experience in office administration or other related fields 

  • Ability to prioritize and multitask 

  • Excellent written and verbal communication skills 

  • Strong attention to detail 

  • Strong organizational skills 

  • Must be able to speak Hindi and English 

Education: Bachelor's (Required), CPA (required), Enrolled Agent: Preferred. 

Experience level: 3 years. 

Compensation 

Salary: $75,000.00 - $110,000.00 per year 

Benefits: 

  • 401(k) 

  • 401(k) matching 

  • Dental insurance 

  • Disability insurance 

  • Health insurance 

  • Life insurance 

  • Paid time off 

  • Vision insurance 

  • Work from home 

Contact 

Interested parties please call 214-646-0300.