Daily Tax Report - October 31, 2011: IRS and Treasury Issue Regulations Extending Religious and Family Member FICA and FUTA Exceptions to Disregarded Entities

IRS AND TREASURY ISSUE REGULATIONS EXTENDING RELIGIOUS AND FAMILY MEMBER FICA AND FUTA EXCEPTIONS TO DISREGARDED ENTITIES:  Today, the IRS and Treasury issued final and temporary regulations that extend the FICA and FUTA exceptions for family members and religious sect members to entities that are disregarded as separate from their owners for federal tax purposes.  The regulations are effective November 1, 2011.

  • In 2007, the IRS and Treasury issued Treas. Reg. ยง 301.7701-2(c)(2)(iv), which provides that an entity that is disregarded as an entity separate from its owner for federal tax purposes is treated as a separate entity for employment tax purposes. 
    • Today, in issuing final and temporary regulations, the IRS and Treasury stated that they did not intend to render the FICA and FUTA exceptions in sections 3121(b)(3), 3127, and 3306(c)(5) inapplicable to disregarded entities that were eligible for the exceptions prior to the effective date of the 2007 regulations.
  • Under the temporary regulations, a disregarded entity will be disregarded for the limited purposes of applying the FICA and FUTA exceptions in sections 3121(b)(3), 3127, and 3306(c)(5), but will otherwise continue to be treated as a corporation for employment tax purposes.
    • For purposes of applying these exceptions, the owner of the disregarded entity will be treated as the employer and the employee will be considered to be an employee of the owner.
  • The temporary regulations also clarify that the owner of a disregarded entity, and not the disregarded entity itself, is responsible for backup withholding and information reporting of reportable payments under section 3406.
  • The regulations can be accessed via: http://www.steptoe.com/publications/[TD%209554].pdf and http://www.steptoe.com/publications/REG%20136565%2009.pdf.
  • For additional information, contact - Aaron P. Nocjar - anocjar@steptoe.com

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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