Partners Are Not Employees – But IRS Asks For Comments

Partners in a partnership that owns a disregarded entity—a single-owner business that isn't a corporation—are subject to self-employment taxes the same way a sole proprietor is, the IRS said in rules intended to clear up what it said is a misconception among some partners.  However, the agency said it is asking form comments to determine if tax practitioners can lay out the case for why it is necessary and wouldn't open new doors for abuse.
 
The agency asked for comments on whether to allow partnerships to treat partners as employees in certain circumstances—"for example, employees in a partnership who obtain a small ownership interest in the partnership as an employee compensatory award or incentive"—and the effect on employee benefit plans and employment taxes.  It also asked for comments on two-tiered structures and whether an investor partner in an upper-tier entity can be an employee of a lower-tier entity.
 
The IRS needs to address the fact that some accounting firms and tax preparers are ignoring the regulations and issuing Schedules K-1 and Forms W-2 to someone who is a partner-employee, according to practitioner comments at the American Bar Association Tax Section meeting in Washington, DC.
 
To give partnerships time to make payroll and benefit plan adjustments, the IRS said, the temporary rules will apply on the later of Aug. 1 or the first day of the latest-starting plan year after May 4, 2016, of an affected benefit plan sponsored by the business.