QSubs recognized as separate entities for employment and excise taxes.

• Author: Leggiero, Heather J.
• Position: Qualified subchapter S subsidiaries

The IRS has issued final regulations that treat qualified subchapter S subsidiaries (QSubs) and other disregarded entities (DEs) as separate entities for federal employment tax and certain excise tax purposes (TD 9356). Although the regulations are effective as of August 16, 2007, the employment tax provisions apply to wages paid on or after January 1, 2009, and the excise tax provisions apply to periods beginning on or after January 1, 2008.

Notice 99-6 may still be used by taxpayers for wages paid prior to January 1, 2009. This will give taxpayers the time necessary to modify their systems to comply with the final regulations. Beginning for wages paid on or after January 1, 2009, these rules eliminate the options afforded taxpayers under Notice 99-6. Previously, a taxpayer was allowed to calculate, report, and pay all the DE's employment tax obligations either under the owner's name and taxpayer identification number (TIN) or under the DE's name and TIN.

The final regulations clarify that a DE is treated as a separate entity and as a corporation for purposes of the federal employment tax, although it continues to be disregarded for other federal tax purposes. The owner of a DE treated as a sole proprietorship is subject to self-employment taxes under the Self-Employment Contributions Act and continues to be treated as self-employed, not as an employee of the DE.

Practitioners commenting on the proposed regulations suggested that the regulations would increase the administrative burden for taxpayers, predicting that complications could arise in states where state employment tax filings are required at the owner level. The IRS and Treasury stated in the preamble to the regulations that they believe separate entity reporting will improve administration of the federal tax laws and simplify federal tax compliance. They also noted that most states adopt the separate entity concept for employment tax purposes; thus, federal and state reporting...