Employee status barred for partnership partners owning a DRE

Tax Hot Topics newsletterThe IRS released final regulations (TD 9766) regarding the employment tax treatment for partners of a partnership that owns a disregarded entity (DRE). The final regulations finalize temporary regulations issued in May 2016.

The regulations were issued in response to perceived abusive practices where partners of a partnership that owned a DRE tried to avoid self-employment taxes and become eligible to participate in certain employee benefit plans by taking the position that they were employees of that DRE. Since a DRE is treated as a corporation for employment tax purposes, the DRE, rather than the owner(s), is considered the employer of the DRE’s employees for employment tax purposes. Therefore, an employee of a DRE is only responsible for the employee-share of withholding and would generally pay less employment tax than a partner in the same financial position. However, this rule does not apply for self-employment tax purposes. Effective for July 2, 2019, the final regulations provide that partners of a partnership are not considered employees for employment tax purposes of any DRE owned by their partnership.

The final regulations do not address tiered partnership situations, but the preamble to the regulations indicates that the IRS will continue to consider tiered partnerships (and other scenarios) and welcome further comments regarding these matters.
Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107
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