The IRS has issued new rules that, among other things, clarify partners should not be counted as employees, at least as far as self-employment tax goes. Under current tax regulations, if a business entity has a single owner, and is not a corporation §301.7701-2(b), then it is considered a disregarded entity. The IRS noted that, for employment tax purposes, the disregarded entity, rather than the owner, is considered the employer. This, however, has led certain taxpayers to take a broader interpretation of the statute than was intended, at least when that owner is a partnership, said the IRS. 

"It has come to the attention of the Treasury Department and the IRS that even though regulations set forth a general rule than an entity is disregarded as a separate entity from the owner for self-employment tax purposes, some taxpayers may have read the current regulations to permit the treatment of individual partners in a partnership that owns a disregarded entity as employees of the disregarded entity. ... Under this reading, which was not intended, some taxpayers have permitted partners to participate in certain tax-favored employee benefit plans," according to the IRS. 

To address this, the new rules make it explicit that the employment tax rules as they pertain to disregarded entities does not apply to self-employment tax treatment of any individuals who are partners in a partnership owning a disregarded entity. 

"The rule that the entity is disregaded for self-employment tax purposes applies to partners in the same way that it applies to a sole proprietor or 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," said the IRS. 

The new rules go into effect today.