Partnerships: IRS Extends Prohibition on Treating Partners as Employees

Employees of partnerships, LLCs or their disregarded entity subsidiaries who receive equity in such entities may be treated as “self-employed” for tax purposes.

On May 3, 2016, the US Treasury Department (Treasury) issued new temporary and proposed regulations (the Regulations) addressing the self-employment tax treatment of an individual that is both: (i) an employee of an entity that is disregarded for federal income tax purposes (such as a single-member limited liability company (LLC)), commonly referred to as a “DRE”; and (ii) a partner or member in a parent partnership or LLC that owns the DRE employer. The Regulations provide that, for self-employment tax purposes, the DRE is disregarded and the individual is subject to the same self-employment tax rules as a partner in a partnership that does not own the DRE.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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