Last month, the Internal Revenue Service (the “IRS”) and the Treasury Department (“Treasury”) issued final and temporary regulations that clarify the employment tax treatment of partners in a partnership that provide services to a disregarded entity owned by the partnership. The new regulations provide that the partners are treated as self-employed, rather than as employees of the disregarded entity. As a consequence, the partners are not eligible to participate in, and may be subject to less favorable tax rules for their benefits under, certain employee benefit plans.
Instead, an individual who is a partner and provides services to the partnership is treated as self-employed. In releasing the new regulations, the IRS and Treasury requested comments on:
- the appropriate application of this principle in the context of tiered partnerships; and
- circumstances in which it may be appropriate to permit a partner also to be an employee of the partnership.