Can a partner in a partnership be treated as an employee of the partnership for federal employment tax purposes? For administrative convenience and/or access to a wider variety of employee benefit plans, some individuals and partnerships have contracted with Certified Professional Employer Organizations (CPEOs) and have been paid like employees, receiving a Form W-2 for part or all of the amount they are paid.
Final regulations were recently issued that address the employment tax liabilities of CPEOs. They clarify that for purposes of federal employment taxes and other obligations under the federal employment tax rules, a CPEO is generally treated as the employer of any individual performing services for a customer of the CPEO, but only with respect to remuneration remitted to the covered employee by the CPEO.
Requirements in the Final Regulations
In short, the regulations include requirements that must be satisfied in order to remain a CPEO, and the federal employment tax liabilities and obligations of those certified as CPEOs.
The regulations stipulate that sole proprietors and partners of a partnership (self-employed owners) are not considered to be “covered employees.” That means payments by a CPEO that would typically be net earnings from self-employment – if paid by the client – will be considered as payment to a self-employed owner.
Action for the Self-Employed Owner
If you are a self-employed owner, you need to be aware of how your employment taxes are to be reported and how you must remit employment taxes to the IRS. If you contract with a professional employer organization (CPEO) to file tax returns and to withhold employment taxes on wages, be aware of the final regulations and make any necessary changes before Jan.1, 2020. For example, self-employed owners will no longer receive Form W-2. They will need to remit applicable employment taxes, including those required by the Self-Employed Contributions Act.
Compensation paid on or after January 1, 2020, to self-employed individuals should be reported on Form 1099-Misc. Payments to partners providing services to the partnership should be reported on Form 1065, Schedule K-1.
Your tax advisor can provide guidance regarding these final regulations and their impact.
Goldin Peiser & Peiser counsels many types of businesses, including sole proprietors, partnerships, and S corporations, on reducing tax liabilities and forming the most advantageous business entities. For more information about these changes or other questions for our Tax Services Group, contact Tax Partner Michelle Johnson, CPA, at (214) 635-2601.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.