NQ Client Services Manager (Private Label) (Lake Mary FL / Dallas TX)
Associate Attorney - Tax (Honolulu HI)
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|Question 154: A company is a single-member LLC that is disregarded for income tax purposes. The single member of the LLC is a limited partnership. Some of the employees who perform services for the LLC are limited partners. Is there any reason these employees/limited partners should not (1) be treated as employees for employment tax purposes and (2) participate in the employee benefit plans sponsored by the LLC?|
Answer: You are correct that a Limited Liability Company (LLC) with only one member, which does not elect to be taxed as a corporation, is disregarded as a separate entity for tax purposes. What does that mean? That may be easiest to understand with an example or two. Each LLC in these examples has only one member and has not elected to be taxed as a corporation.
So, how does this apply to a limited partnership as the sole member of an LLC? Much as with the corporation, it is as though the LLC did not exist, and the LLC business was a division of the partnership's general business. All income and expenses are reported on the partnership's 1065 just as though the LLC did not exist and the partnership were operating its business directly.
How are partners treated for payroll tax purposes? Revenue Ruling 69-184 is very explicit:
Moving specifically to the issue of limited partners, we have Revenue Ruling 70-411. It is important to note that this is a pre-ERISA ruling, in a day when partners were not eligible to be in a standard qualified plan. But, while the conclusion of the ruling is no longer valid, the ruling is still important because of its reasoning that a partner is a partner -- and not an employee -- even if he is a limited partner:
So, with this in mind, it seems clear that the limited partners should be treated as limited partners for employment tax purposes. The fact that there is a disregarded LLC in the middle is irrelevant.
IRS Publication 533 makes it clear that limited partners who receive guaranteed payments are subject to self-employment tax:
Thus, these limited partners are partners, not employees. They should not receive a W-2 form. Because they are receiving regular payments for services, they are treated as self-employed individuals and they pay self-employment tax accordingly.
Notice 99-6 while acknowledging that the a disregarded entity is disregarded for employment tax purposes, allows the disregarded entity to file and pay employment taxes for its employees as though it were the employer. I do not believe this affects my conclusions, and discuss why in Q&A 155.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.