Share with your friends

Self-employment tax treatment, partners in partnership that owns disregarded entity

Self-employment tax treatment, partners in partnership

The Treasury Department and IRS today released for publication in the Federal Register temporary regulations (T.D. 9766), and by cross-reference, proposed regulations (REG-114307-15) that are intended to clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.


Related content

Read the temporary regulations [PDF 221 KB] and proposed regulations [PDF 218 KB]


These regulations will appear in the Federal Register on May 4, 2016. Comments and requests for a public hearing are due by a date that is 90 days after May 4, 2016.

Reason for regulations

Current regulations provide that a disregarded entity is treated as a corporation for employment tax purposes and provide an exception to that treatment in the case of a disregarded entity that is treated as a sole proprietorship. In the case of the sole proprietorship, the owner of the disregarded entity is subject to tax on self-employment income. An example illustrates the exception. Taxpayers have interpreted the language of the regulations to allow partnerships that own a disregarded entity (treated as a corporation) to treat partners as employees of disregarded entity.

Today’s regulations were promulgated in proposed and temporary form, with a liberal effective date, to address the employment tax classification of a disregarded entity owned by a partnership.


The temporary and proposed regulations clarify that a disregarded entity that is generally treated as a corporation for purposes of employment taxes is not treated as a corporation for purposes of employing its individual owner (who is treated as a sole proprietor) or for purposes of employing an individual who is a partner in a partnership that owns the disregarded entity. In such instances, the regulations provide that the entity is disregarded as an entity separate from its owner, and that the partners are subject to the same self-employment tax treatment as partners in a partnership that does not own a disregarded entity.

The preamble to the temporary regulations includes a request for comments as to whether Rev. Rul. 69-184 (which applies to to tiered partnership situations) ought to be modified to allow partnerships to treat partners as employees in certain circumstances—for example, employees in a partnership who obtain a small ownership interest in the partnership as an employee-compensatory award or incentive. Comments are requested concerning the implications of such changes on employee benefit plans and on employment taxes if Rev. Rul. 69-184 were to be modified to permit partners to be employees in certain instances.

Effective date

The temporary regulations are effective on the later of: (1) August 1, 2016; or (2) the first day of the latest-starting plan year following May 4, 2016, of an affected plan (based on the plans adopted before, and the plan years in effect as of May 4, 2016) sponsored by an entity that is a disregarded entity. This is intended to allow adequate time for partnerships to make payroll and benefit plan adjustments.  

Related discussion

Read a May 2016 report [PDF 166 KB] prepared by KPMG LLP that addresses application of the Self Employment Contributions Act (SECA) to net income derived from self-employment—including by partners in partnerships and limited liability partnerships (LLPs), members in limited liability companies (LLCs), and sole proprietors. An entity may not realize that LLC or LLP members are subject to SECA.

KPMG observation

Despite the language of the regulations, tax professionals believe that unfortunately the effective date provisions likely do not allow sufficient time for partnerships to adjust their systems to this change in guidance.  

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organization please visit

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal