Category: Partnerships & LLCs; Compensation
& Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Discussion In addition, Revenue Ruling 69-184, 1969-1 CB 256, provides that bona fide members of a partnership are not employees for purposes of FICA, FUTA, or income tax withholding. The ruling holds that no matter whether the partner provides services to the partnership as an independent contractor or in the capacity as a partner, he is in either case self-employed. The Service has also ruled that a partner cannot be treated as an employee for purposes of a qualified retirement plan. Rev. Rul. 70-411, 1970-2 CB 91. Note that a retirement plan loses its qualified status if it covers non-employees. Rev. Rul. 69-493, 1969-2 CB 88. While it is true that the rules governing tax qualified retirement plans covering self-employed persons have changed drastically since this ruling was issued, in the event the taxpayer has a qualified retirement plan, this matter should be explored in depth with a retirement plan specialist. As self-employed individuals, the partners are liable for self-employment tax on what was originally characterized at the partnership level as wages. If this matter were scrutinized by the IRS, presumably the individual partners would be assessed self-employment taxes. This is a situation of worker misclassification in reverse. In the usual case, workers who are really employees are misclassified as independent contractors. In this case, bona fide independent contractors have been misclassified as employees. There are various offset provisions to relieve employers of their withholding obligations if they can show that the misclassified worker paid self-employment tax and income tax on the amounts that should have been classified as wages. There seems to be no comparable provision to allow credit against self-employment taxes for the employer share of FICA erroneously withheld. Presumably, if the partners were assessed self-employment tax, they would be allowed credit for the employee share of FICA which they paid on the misclassified wages. That, of course, would satisfy one-half of the self-employment tax liability. The partnership paid the employer's share of FICA tax which represents, at least from a numerical point of view, the other half of the self-employment tax liability. It is unclear whether the partners could somehow claim credit for these taxes paid by the partnership. At worst, however, it seems the partnership would be entitled to a refund of such taxes, and the partners would have a deficiency in like amount. In that case, the effect would be the two-point rate differential between overpayments and underpayments plus the effect of the partnership-level disallowance of the deduction for the employer's share of FICA offset (when paid) by the partner level deduction for one-half of self-employment taxes. Regarding fringe benefits, I offer the following comments. It is clear that partners are not treated the same as rank-in-file employees for fringe benefit purposes. Most tax-favored fringe benefits depend on employee status. A partner cannot be an employee of a partnership of which he is a member. Accordingly, unless the enabling fringe benefit statute specifically allows partners to receive a given benefit on a tax free basis, a partner would be taxed on the value any such benefits provided by the partnership.Following is a partial list of fringe benefits that would be taxed if provided to partners:
See Revenue Ruling 91-26, 1991-1 CB 184, for details on handling partnership-provided health insurance benefits. The are a few fringe benefits that specifically allow partner participation. See IRC Section 132 and Temp. Reg. 1.132-1T(b)
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