Who's the Employer?

• Example 1. Suppose I, as an individual, set up an LLC. I would report all of the income and expenses from that LLC on Schedule C of my tax return, just as though it were a sole proprietorship. I would pay self-employment taxes on that income.



• Example 2. Suppose XYZ corporation sets up an LLC. It would report all of the income and expenses from that LLC on its form 1120, just as though the LLC were a division or department of the corporation.

Bona fide members of a partnership are not employees of the partnership within the meaning of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954). Such a partner who devotes his time and energies in the conduct of the trade or business of the partnership, or in providing services to the partnership as an independent contractor, is, in either event, a self-employed individual rather than an individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. Sections 1402(a) and 3121(d)(2) of the Code.

Remuneration received by a partner from the partnership is not "wages" with respect to "employment" and therefore is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration also is not subject to Federal income tax withholding.

Advice has been requested whether a partnership's profit-sharing plan may qualify under section 401(a) of the Internal Revenue Code of 1954 if it permits "special partners" to participate under the circumstances described below.

The partnership adopted a profit-sharing plan intended to meet the requirements of section 401(a) of the Code. The plan, which is not designed to include self-employed individuals, provides for annual contributions of six percent of compensation on behalf of all employees, including "special partners." The term "special partner" is defined in the partnership agreement to mean a limited partner who is employed by the partnership to perform such services as would be performed by a regular common-law employee of the partnership. These special partners are intended to have the dual status of employees and partners, and to receive compensation with respect to their services performed as employees while also receiving a share of the partnership profits with respect to their investment in the partnership.

Revenue Ruling 69-493, C.B. 1969-2, 88, holds that a plan covering persons who are not employees of the employer does not meet the qualification requirements of section 401 of the Code. Revenue Ruling 69-144, C.B. 1969-1, 115, holds that, except to the limited extent applicable to the participation of self-employed individuals after December 31, 1962, partners are not employees and, therefore, are not eligible to participate in a qualified plan.

Once an individual's status is established as a bona fide partner of a partnership, it is immaterial, for purposes of his participation in a qualified plan of the partnership, how his partnership interest is defined.

Accordingly, it is held that the partnership's profit-sharing plan does not qualify under section 401(a) of the Code since it permits "special partners" to participate.

Limited partner. If you are a limited partner, your partnership earnings are generally not subject to SE tax. However, guaranteed payments you receive for services you perform for the partnership are subject to SE tax and should be reported to you on line 15a or in box 9 of your Schedule K-1.