n-99-6.pdf

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Part III - Administrative, Procedural, and Miscellaneous
Payment of Employment Taxes with Respect to Disregarded Entities
Notice 99-6
PURPOSE
This notice solicits comments from taxpayers and
practitioners regarding issues related to employment tax
reporting and payment by qualified subchapter S subsidiaries and
other entities that are disregarded as entities separate from
their owners for federal tax purposes. This notice also
discusses two methods of employment tax compliance that will be
accepted by the Service until such time as formal reporting
procedures are provided in other guidance.
Since the recent enactment of legislation and promulgation
of regulations providing that certain wholly owned entities will
be disregarded as entities separate from their owners, the
Service has received many questions from taxpayers concerning the
treatment of disregarded entities for federal employment tax
purposes. To help employers comply with the employment tax
requirements, the Department of the Treasury and the Internal
Revenue Service intend to issue guidance illustrating the proper
method for reporting employment taxes with respect to these
entities.
BACKGROUND
Under § 1361 of the Internal Revenue Code (as amended by

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§ 1308 of the Small Business Job Protection Act of 1996, Pub. L.
No. 104-188, 110 Stat. 1755 and § 1601 of the Taxpayer Relief Act
of 1997, Public Law 105-34, 111 Stat. 788), an S corporation may
own a qualified subchapter S subsidiary. Section 1361(b)(3)(B)
defines the term "qualified subchapter S subsidiary" (QSub) as a
domestic corporation that is not an ineligible corporation (as
defined in § 1361(b)(2)), if (1) an S corporation holds 100
percent of the stock of the corporation, and (2) that S
corporation elects to treat the subsidiary as a QSub. Except as
otherwise provided in regulations, a corporation for which a QSub
election is made is not treated as a separate corporation for
federal tax purposes, and all assets, liabilities, and items of
income, deduction, and credit of the QSub are treated as assets,
liabilities, and items of income, deduction, and credit of the
parent S corporation. Similar rules apply to qualified REIT
subsidiaries under § 856(i).
Regulations issued under § 7701 of the Code provide for
another type of disregarded entity. Section 301.7701-2(c)(2) of
the Procedure and Administration Regulations provides that a
business entity that has a single owner and that is not a
corporation under § 301.7701-2(b) is disregarded as an entity
separate from its owner for all federal tax purposes.
In general, employment tax responsibilities rest with an
employer. For federal employment tax purposes, the common law

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rules for determining the identity of the employer ordinarily
apply. Under these rules, the person for whom services are
performed as an employee is generally considered the employer for
purposes of the employment tax provisions. An employer generally
is required to withhold and pay over applicable taxes from
employees’ wages, pay employer taxes, make timely tax deposits,
file employment tax returns, and issue wage statements to
employees (collectively, Aemployment tax obligations@).
REQUEST FOR COMMENTS
Section 1361(b)(3) and § 301.7701-2(c)(2) cause the owner of
a disregarded entity to be treated as the employer of the
disregarded entity’s employees for federal employment tax
purposes. Thus, the owner generally is responsible for complying
with all the employment tax obligations related to those
employees.
Since enactment of the QSub statute and promulgation of the
disregarded entity provision of the regulations, however, many
taxpayers have mistakenly interpreted § 1361(b)(3) and
§ 301.7701-2(c)(2) as applying only for federal income tax
purposes. In addition, the Service has received numerous
comments and questions from other taxpayers that have properly
interpreted the statute concerning the difficulties that arise
from application of these provisions. Some of these taxpayers
have expressed a strong preference for the continued recognition

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for employment tax purposes of the separate state law entities.
Other taxpayers have expressed a preference for a literal
application of the provisions, resulting in the treatment of the
owner of the disregarded entity as the employer.
Prior to issuing formal guidance, the Service is requesting
comments concerning employment tax and certain reporting issues
relating to disregarded entities that should be addressed in
future guidance. This notice solicits comments from taxpayers
and practitioners regarding the following issues:
1) Any increase or decrease in the administrative burden on
taxpayers created by a system of filing employment tax returns
under the owner’s name and taxpayer identification number where
employees are actually employed by a state law entity that is
disregarded as an entity separate from its owner for federal tax
purposes;
2) Whether different rules should apply to newly formed
disregarded entities with no previous employment tax history as
opposed to entities in existence prior to the time when they
became disregarded;
3) Different results (both in amount of tax, type of tax, and
time and method of deposits) that arise from filing as one
employer as compared to filing as separate employers;
4) Appropriate methods for notifying the service center about
changes in employment tax obligations when an entity’s status as

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a disregarded entity changes;
5) Possible issues arising in situations where the owner or
the disregarded entity is formed or domiciled in a country other
than the United States;
6) Additional issues relating to employment taxes and
disregarded entities including, but not limited to, confusion for
employees, employers, and state and federal agencies resulting
from a single entity reporting structure for employment tax
purposes; and
7) Whether any guidance issued should also apply to qualified
REIT subsidiaries (as defined in § 856(i)).
Comments are also requested concerning issues related to
disregarded entities but outside the employment tax area. Those
issues include but are not limited to the following:
1) Information reporting on IRS Form 1099s issued by, or with
respect to, disregarded entities and their owners; and
2) Issues related to qualified or nonqualified deferred
compensation plans, fringe benefit and welfare plans, and other
compensation arrangements.
Written comments should be sent to the following address:
Internal Revenue Service
CC:DOM:CORP (NT 99-6; CC:DOM:P&SI:1)
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

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In the alternative, comments may be hand delivered between the
hours of 8:00 a.m. and 5:00 p.m. to the courier’s desk at 1111
Constitution Avenue, NW., Washington, DC, or submitted
electronically via the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html .
Because the Service and Treasury would like to receive
comments early in the developmental stages of potential guidance,
comments should be forwarded to one of the addresses above prior
to April 20, 1999. However, to the extent possible,
consideration will be given to comments received after that date.
TEMPORARY EMPLOYMENT TAX PROCEDURES
Until additional guidance is issued, the Service generally
will accept reporting and payment of employment taxes with
respect to the employees of a QSub or an entity disregarded as an
entity separate from its owner under § 301.7701-2(c)(2) if made
in one of two ways:
1) Calculation, reporting, and payment of all employment tax
obligations with respect to employees of a disregarded entity by
its owner (as though the employees of the disregarded entity are
employed directly by the owner) and under the owner's name and
taxpayer identification number; or
2) Separate calculation, reporting, and payment of all
employment tax obligations by each state law entity with respect
to its employees under its own name and taxpayer identification

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number.
If the second method is chosen, the owner retains ultimate
responsibility for the employment tax obligations incurred with
respect to employees of the disregarded entity. This method
merely permits the employment tax obligations of the owner
incurred with respect to the disregarded entity to be fulfilled
through the separate calculation, reporting, and payment of
employment taxes by the disregarded entity. Accordingly, the
Service will not proceed against the owner for employment tax
obligations relating to employees of a disregarded entity if
those obligations are fulfilled by the disregarded entity using
its own name and taxpayer identification number, even if there
are differences in the timing or amount of payments or deposits
as calculated under the second method. If the first method is
selected, a final employment tax return should be filed with
respect to a disregarded entity that formerly calculated,
reported, and paid its employment tax obligations on a separate
basis.
An owner of multiple disregarded entities may choose the
first method with respect to some disregarded entities and the
second method with respect to its other disregarded entities.
The fact that an owner of a disregarded entity chooses to
calculate, report, and pay its employment tax obligations under
the second method with respect to a given disregarded entity for

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one taxable year will not preclude the owner from switching to
the first method in a subsequent taxable year. However, if the
owner uses the first method of calculating, reporting, and paying
employment tax obligations with respect to a given disregarded
entity for a return period that begins on or after April 20,
1999, the taxpayer must continue to use the first method unless
and until otherwise permitted by the Commissioner.
DRAFTING INFORMATION
The principal authors of this notice are Deanna Walton of
the Office of Assistant Chief Counsel (Passthroughs and Special
Industries) and John Richards of the Office of Associate Chief
Counsel (Employee Benefits and Exempt Organizations). For
further information regarding this notice contact Ms. Walton at
(202) 622-3050 or Mr. Richards at (202) 622-6040 (not toll-free
calls).