Employment tax reporting for disregarded entities.

• Author: Torretta, Mary

Many tax-exempt organizations have formed single-member limited liability companies (SMLLCs) as integral parts of their entity structure. Because of their flexible treatment for tax purposes, limitation of liability, easy transferability of ownership interest by sale or exchange, and separate governance and management, SMLLCs are widely used to conduct various activities and hold investments. However, SMLLCs with employees have new reporting requirements effective January 1, 2009.

Background

Some of the important benefits associated with an SMLLC come from its treatment as a disregarded entity for income and employment tax purposes. Absent an election to the contrary, (1) federal tax law treats an SMLLC as a division of the single member rather than as a separate entity. (2) In the context of income tax reporting by a tax-exempt organization, classification as a disregarded entity means that the SMLLC's revenue, expenditures, and activities are attributed to (and reportable by) the single member on Form 990, Return of Organization Exempt from Income Tax. (3)

Under the prior version of Regs. Sec. 301.7701-2(c)(2), a noncorporate entity with a single owner was disregarded as a separate entity for most federal purposes. The Service clarified in Notice 99-6 that this disregarded entity status also included exemption from federal employment tax reporting. (4) Notice 99-6 gave employer organizations an option: The disregarded entity's employment taxes could be paid and reported using the name and employer identification number (EIN) of either the owner or the disregarded entity. (5)

On October 18, 2005, the IRS published a notice of proposed rulemaking, saying that disregarded entities should be treated as separate entities for purposes of employment tax and related reporting requirements. (6) After the comment period, Treasury made revisions based on comments received and adopted the proposed regulations. (7)

Before the regulations were adopted, taxpayers had a choice of treating the SMLLC's employees as employees of either the SMLLC or the single member. But the rules have changed; effective January 1, 2009, separate reporting will be required for federal employment tax purposes. (8) T.D. 9356 explicitly supersedes Notice 99-6 as the law relating to the employment taxes of disregarded entities for any wages paid on or after January 1, 2009. (9)

The Service's two stated purposes for the change were (1) to improve federal tax law administration...