Vision Payroll

This week’s question comes from Nicole, an office manager. Our business is formed as two entities, an S corporation and a partnership. We’re located in Massachusetts. Do I now need to withhold income tax on distributions to partners and S corporation shareholders? Answer: All pass-through entities subject to pass-through withholding in Massachusetts must withhold unless the partner or shareholder to whom the distribution is paid has timely filed Form PTE-EX. The filing of Form PTE-EX with the entity certifies that the member is exempt from pass-through withholding. The deadline for filing Form PTE-EX the last day of the fourth month of the entity’s taxable year or within thirty days of the day that the member joins the entity, whichever is later. The form is now valid until changing circumstances invalidate the form, in which case the member must notify the entity within thirty days. Vision Payroll is ready to help its clients deal with the changes required by this new law. Please call us for our recommendations for a smooth transition to the new withholding requirements.

This week’s question comes from Carl, a partner in a partnership. I am an investor in a partnership and own a 25% interest as a partner. I also work for the business that the partnership owns. Can I be paid through payroll, have tax withheld, and receive a Form W-2? Answer: It is long established in tax law that partners in a partnership are not employees of the partnership. In Rev. Rul. 69-184, 1969-1 CB 256, the Internal Revenue Service confirmed this, stating:

Remuneration received by a partner from the partnership is not “wages” with respect to “employment” and therefore is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration also is not subject to Federal income tax withholding.

Partners cannot receive a Form W-2 from the partnership. They may receive a draw from the partnership and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.

In TIR 08-8: Sales/Use Tax, Withholding and Administrative Changes Contained in Chapter 182 of the Acts of 2008, the Massachusetts Department of Revenue (DOR) commented on the changes required by the new law. For withholding purposes, the law allows the DOR to require withholding by S corporations and entities treated as partnerships for tax purposes on distributions to shareholders or partners. In Proposed 830 CMR 62B.2.2: Pass-Through Entity Withholding, the DOR listed which entities would be required to withhold and which shareholders and partners would be exempt from withholding. It also addressed several administrative issues related to registration, payment, and reporting. TIR 08-8 confirmed that a final form of the proposed regulation will soon be promulgated effective for tax years beginning on or after January 1, 2009. Vision Payroll is ready to help its clients deal with the changes required by this new law. Please call us for our recommendations for a smooth transition to the new withholding requirements.