Two's company: answering questions of partnership in your business.

• Author: Counts, James C.

Can partners be employees? And should they? The answer, as in Mail tier areas of the tax law: it depends.

IRS Revenue Ruling IRR 69-184 states. -Remuneration received lw a partner from the partnership is not 'wages' with respect to 'employment' tent and therefore is ma subject to the taxes imposed by the Federal litsurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration is not subject to Federal income tax withholding."

* That seems straight forward, but sonic do not to take it at lace value.

For instance, the California Employment Development Department has said for LLCs treated as a partnership: ii a member was not a manager under the articles of orgmization and was subject to the direction and control by one or more managers, then the member would normally be a common law employee. This is no longer the law effective Jan. 1, 2015. (See sidebar, Page 22.)

Is the Business a Partnership?

RR 69-184 applies to partnerships. so the first determination that has to be made is if the business is a partnership.

A partnership has to have two or more pare ICI'S. A partner can be an equity partent. a profits partner or both.

An equity partner must have sullicient size (not defined in the tax code, but many assume to be at least 1 percent to be a partnership interest and is a partner immediately. A profits partner is a partner upon receiving the profits interest.

For instance. if a couple wholly own an unincorporated business as community property, they may elect to report the business as a partnership or as a sole propirietorship of the one running the business. The spouse not reporting the business could be an employee of the reporting spouse.

Each spouse should seek their own advice as to if they should or should not report the business as a partnership or a sole proprietorship. The CPA preparing the couple's income tax returns should not make the decision for the couple what they wish to do as it could affect later benefits received or ownership rights.

in the case of LLCs With MO Or more owners, the delault entity of. the Ilk: is a partnership. but the LLC: members may elect to be treated as a C or S corp.

Under the C: or S corp election, the LLC members may be required to be reported as employees. If they had elected to be reported as a partnership, they would not have qualified to be reported ;As an employee.

In discussions with taxpayers who have set up LLCs without adequate tax advice, I find that issues such as this...