SR Client Question: Can partners concurrently be employees?
A partner CANNOT be an employee of the partnership. This conclusion is per the following:
a) I.R.S. Revenue Ruling 69-184 (1969-1 CB 256, IRC Sec(s) 3121,
b) General Counsel Memorandum 34173, 7/25/1969, IRC Sec(s) 119
c) General Counsel Memorandum 34001, 12/23/1968, IRC Sec(s) 1402.
The laws, as cited above, clearly state that “Bona fide members of a partnership are not employees of the partnership…” (Rev. Rul. 69-184). A partner in a partnership is considered to be a self-employed individual. “For tax purposes, a partnership has no legal existence independent from the individual partners. The partnership and the partners are one and the same legal entity. …In the eyes of the taxing statute, therefore, a partner cannot be an employee of the partnership”. (General Counsel Memorandum 34173, 7/25/69, citing Commissioner v. Doak (C.A. 4, 1956) 234 F.2nd 704).
The I.R.S. has recently reaffirmed this in May 2016, per T.D. 9766.
Per b) above, General Counsel Memorandum 34173, discussing guaranteed compensation to a partner, noted the following:
“The guaranteed compensation paid to a partner is:
1) not subject to withholding at source (section 3402),
2) not subject to the employment taxes (Federal Insurance Corporations Act and Federal Unemployment Tax Act), frequently referred to as Social Security taxes, imposed by Chapters 21 and 23, Subtitle C,
3) not considered to be compensation paid to an employee for purposes of a pension or profit sharing plan under sections 401-404, inclusive,
4) not subject to any exclusion under section 101(b) for payment of death benefits to an employee, or under 105(d) for payments under a wage continuation plan.”T
Therefore, a bona fide partner cannot, contemporaneously, be an employee of the partnership.