Owners of qualified subchapter S subsidiaries (QSubs) and limited liability companies (LLCs) will no longer be responsible for employment and excise taxes. Despite their status as disregarded entities, QSubs, LLCs and other eligible entities, not the owners, must now pay employment and excise taxes.

Under new rules finalized by the IRS, the Service has shifted responsibility for employment and excise taxes from owners to the disregarded entities, marking a change from previous rules that allowed either the disregarded entity or its owner to pay such taxes. Nevertheless, disregarded entities will continue to be disregarded for other federal tax purposes.

The new rules apply to QSubs, LLC’s and single-owner eligible entities disregarded for Federal tax purposes under Code Sec. 7701.

Self-employed

The owner of a disregarded entity treated as a sole proprietorship is subject to self-employment taxes under the Self-Employment Contributions Act (SECA). If the owner of a disregarded entity is an individual, the individual is treated as self-employed and therefore, an individual owner of an LLC can not treat himself or herself as an employee of the LLC.

Reporting obligations

In addition to withholding FICA, FUTA and income taxes, and depositing the amounts with the government, the employer must file (under their own name and employer identification number) Form 941, Employer’s Quarterly Employment Return; Form 940, Employer’s Annual Federal Unemployment Tax Return; and Form W-2, Wage and Tax Statement. Excise taxes must be reported on Forms 720, 730, 2290, and 11-C.

The rules are effective August 16, 2007, and apply to wages paid on or after January 1, 2009.

(TD 9356)