n recently issued final and temporary regulations, the IRS has clarified the tax treatment of partners in a partnership that owns a disregarded entity for which the partners work as employees. The regulations, issued on May 4, 2016, clarify that the IRS did not intend to create a distinction between a disregarded entity owned by an individual and a disregarded entity owned by a partnership in the application of the self-employment tax rules. As a result, partners must pay self-employment tax, even if they work for a business entity with a single owner that is “disregarded” as an entity separate from its owner for federal income tax purposes.
Treatment of Partners as Employees
The Internal Revenue Service’s (IRS) long-standing position is that an individual cannot for federal income tax purposes be both an employee and a partner of an entity that is taxed as a partnership.