We are thrilled to announce that Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) has joined forces with Bacchetta & Company in an exciting new partnership!

Partners May Not Be Employees

Article Highlights:

  • Partner Employee Issue

  • Self-employment Tax

If your partnership has been treating you and other partners as employees of a disregarded entity owned by the partnership so the partners can participate in employee benefit plans and receive other employee benefits, you’d better read this. Tax regulations (1) issued by the IRS take aim at this practice and were written to put a stop to it.

Background: A disregarded entity is treated as a corporation (2) for the purposes of employment taxes. Therefore, the disregarded entity, rather than the owner, is considered to be the employer of the entity's employees for the purposes of employment taxes. However, the owner is not treated as an employee and instead pays self-employment tax on the net earnings from self-employment resulting from the disregarded entity's activities.

At one time the regulations did not include an example where the disregarded entity is owned by a partnership, and because of that some taxpayers incorrectly interpreted the regulations to permit partners to participate in certain tax-favored employee benefit plans, which is contrary to the IRS’s intention.

The IRS and the Treasury noted that regulations did not create a distinction between a disregarded entity owned by an individual (a sole proprietorship) and a disregarded entity owned by a partnership in the application of the self-employment tax rule. The IRS has long held (3) that:

  1. A bona fide member of a partnership is not an employee of the partnership, and

  2. A partner who devotes time and energy to conducting the partnership's trade or business, or who provides services to the partnership as an independent contractor, is considered self-employed and is not an employee.

To resolve this issue, the IRS issued regulations modifying the original regulations to clarify the rule that an entity disregarded for self-employment tax purposes applies to partners in the same way that it applies to a sole proprietor owner. Accordingly, the partners are subject to the same self-employment tax rules as partners in a partnership that does not own a disregarded entity.

Self-employment (SE) tax consists of Social Security and Medicare taxes and is similar to the Social Security and Medicare (FICA) taxes withheld from most worker’s wages. An employee, through their withholding taxes, pays half of the FICA taxes, and their employer pays the other half. However, a self-employed person is responsible for paying 100% of the SE tax, and does so by figuring the SE tax on Schedule SE and including the form with their Form 1040 or 1040-SR. The self-employed individual can deduct the employer-equivalent portion of their SE tax in figuring their adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes. A self-employed individual will generally need to make estimated tax payments throughout the year to cover their income and SE tax liabilities.

If this issue affects you, your partnership, and a disregarded entity owned by the partnership and you have questions, please give this office a call.

(1)Reg. Sec. 301.7701-2T
(2)Reg. Sec.301.7701-2(c)(2)(iv)(B)
(3)Rev. Rul. 69-184

Share this article...

More About Us

Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)


Offices in Flemington, NJ and Califon, NJ

Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.

Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.

Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.

Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.

Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.

We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.

Tax & Small Business Updates

Get the latest in tax and small business updates and issues that affect your finances and growth prospects.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Flemington Office

Looking for tax help in Flemington, NJ? You can find us at:

Millburn Office

Looking for tax help in Millburn, NJ? You can find us at:

Califon Office