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Developments in FICA and self-employment tax affect partners and S corporations

Steve Gorin July 11, 2017

I was recently honored to serve as a guest columnist in the June 2017 “Shop Talk” column in WG&L’s Journal of Taxation. The article, “Developments in FICA and Self-Employment Tax Affect Partners and S Corporations,” tied together several recent blogs:

  • IRS gets upper hand in S corporation compensation audits -- Discussed the most recent development in the IRS’ longstanding efforts to reclassify S corporation distributions as compensation, requiring the company and its owner-employees to pay more FICA than they reported. Until recently, a taxpayer who didn’t agree with the IRS would be able go to Tax Court and pay any tax only after the case settled or the Tax Court came to a decision. The IRS persuaded the Tax Court to dismiss some cases for lack of jurisdiction and now has instructed its agents how to deprive taxpayers of their day in Tax Court. Instead, taxpayers need to pay the tax and sue for a refund.

  • Using an S corporation to avoid self-employment tax -- Pointed out that taxpayers often use S corporations to save FICA and self-employment tax. A recent case rebuffed a taxpayer’s efforts to report earnings on an S corporation return when the S corporation was not a party to the contracts that generated the income paid by third parties.

  • Tax court finds no self-employment tax for passive LLC member -- Reported on how, for the first time ever, the Tax Court held that a member of an LLC avoided self-employment tax. Unfortunately, that case was conclusory and did not explain how the taxpayer fit within the exception to self-employment tax. Tax court finds self-employment tax for active LLC member explained how that case was followed by a very well-reasoned case holding that LLC members were required to pay self-employment tax. Although the facts of the cases are very different, applying the reasoning of the second case would have resulted in a different answer in the first case. Taxpayers would have much stronger tax cases if they used limited partnerships that owned LLCs (or did business without the LLCs and instead registered as limited liability limited partnerships).

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This article is not intended to provide legal or tax advice. Please consult an appropriate professional to advise you whether these ideas might help your particular situation.

Steve Gorin is a practitioner in the areas of estate planning and the structuring of privately held businesses.