The U.S. Treasury Department recently issued proposed and temporary regulations clarifying that partners of a partnership providing services to a disregarded entity that is owned by the partnership are treated as self-employed, and not employees of the disregarded entity. Under current treasury regulations, a disregarded entity may be treated as a corporation for employment tax and employee benefit plan purposes, provided that the rule doesn’t apply to the single owner that operates the disregarded entity as a sole proprietorship. In response to certain practitioners interpreting the regulation to permit partners to be treated as employees of the disregarded entity and allowing such partners to participate in a disregarded entity’s tax-favored employee benefit plans, the Treasury Department issued these regulations to clarify that if a partnership is the owner of a disregarded entity, the partners of such partnership are subject to the same self-employment tax rules as if they directly owned the disregarded entity. As a result, such partners cannot be employees of the disregarded entity and should not be eligible to participate in certain tax-favored employee benefit plans of the disregarded entity. The temporary regulations will apply on the later of August 1, 2016, or the first day of the latest starting plan year of an affected benefit plan following May 4, 2019. The Treasury Department also requests comments as to (i) whether it may be appropriate to treat partners as employees in tiered partnership structures, or in certain circumstances when employees receive relatively small partnership interests as a compensatory award or incentive, and (ii) the potential impact on employee benefit plans and self-employment taxes if partners were permitted to be treated as employees.
The temporary regulations are available here.
The proposed regulations are available here.