Tuesday, October 18, 2005

Disregarded Disregarded

The Service has promulgated proposed regulations that would eliminate disregarded entity status for purposes of federal employment taxes and certain excise taxes. As explained in the notice of proposed rulemaking:
A disregarded entity would be regarded for employment tax purposes, and, accordingly, become liable for employment taxes on wages paid to employees of the disregarded entity, and be responsible for satisfying other employment tax obligations (e.g., backup withholding under section 3406, making timely deposits of employment taxes, filing returns, and providing wage statements to employees on Forms W–2). The owner of the disregarded entity would no longer be liable for employment taxes or satisfying other employment tax obligations with respect to the employees of the disregarded entity. The disregarded entity would continue to be disregarded for other Federal tax purposes. The proposed regulations contain an example illustrating the interaction of the income tax provisions and employment tax provisions. For example, the proposed regulations illustrate that an individual owner of a disregarded entity would continue to be treated as self-employed for purposes of Self Employment Contributions Act (SECA) taxes (section 1401 et sequitur).
(Emphasis supplied.)

The proposed regulations, if adopted, would apply to wages paid on or after January 1 following the date the regulations are finalized or, in the case of excise taxes, to liabilities imposed and actions first required or permitted in periods on or after the January 1 following the date of finalization of the new regulations.

With respect to employment taxes, the new regulations mean that for an owner to become liable for a failure to withhold or pay income taxes withheld from employees' salaries or the employees' share of FICA or FUTA, the liability is based on IRC § 6672. Owners would have no liability for the employer's share of FICA or FUTA, except in instances of transferee liability.

Under the proposed regulations, the relationship of LLCs to their single members would more closely approximate the relationship of S corporations to sole shareholders. The remaining difference in the employment tax area would be that owners of S corporations can be employees subject to withholding while sole members of LLCs cannot be employees for withholding tax purposes.

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