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New Regulations End Dual Partner/Employee Planning Technique

May 9, 2016 Business & Tax Blog Self Employment Tax

Temporary and proposed regulations issued May 3, 2016, reaffirm Treasury’s position that an individual cannot be both an employee and a partner of the same tax partnership, and end the ability of tax planners to use a disregarded entity in conjunction with a tax partnership to change an individual’s self-employment tax treatment. Previously, tax planners would use the rule that disregarded entities are treated as corporations for employment tax purposes to set up a structure whereby a tax partnership owned a disregarded entity with the partners treated as employees of the disregarded entity and not the tax partnership. The primarily motivation for such structures was to permit the partners to be employees and enable Form W-2 withholding instead of having the partners pay self-employment tax and make estimated tax payments. The new regulations provide that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of individuals who are partners in a partnership that owns a disregarded entity. A link to the new regulations is here:

Michael J. Wilson