New Regulations Governing Employer Identification Numbers for Disregarded Entities

Stuart Freeland
November 16, 2007 — 1,314 views  
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Recently, the Internal Revenue Service issued amended regulations governing required employer identification numbers for qualified S corporation subsidiaries (“Qsubs”) and other single owner entities that are disregarded as separate from their owners for federal tax purposes, commonly referred to as disregarded entities. Presently, under Notice 99-6, 99-1 C.B. 321, disregarded entities may satisfy their employment tax obligations in either of two ways: (1) by calculating, reporting and paying their employment tax obligations as though their employees were employed directly by the owner of the disregarded entity and under the owner’s name and taxpayer identification number; or (2) separately calculating, reporting, and paying their employment tax obligations under their own name and taxpayer identification number. In 2005, the Service issued proposed regulations to eliminate the alternative set forth in clause (1) by requiring separate treatment of employment tax obligations for disregarded entities because of administrative difficulties that had arisen, particularly in states that that had not adopted the federal disregarded entity rules. The proposed regulations, as revised, became final on August 15 of this year. Once these regulations take effect on January 1, 2009 for employment taxes, wages paid must calculated, reported and paid under the name and taxpayer identification number of the disregarded entity. The requirement for separate treatment will also apply for certain excise taxes owed by disregarded entities, effective January 1, 2008. For all other purposes disregarded entities must continue use the taxpayer identification number of their owner. Therefore, in most cases, it will be advisable to obtain a separate employer identification number when forming a Qsub or other disregarded entity between now and January 1, 2009 and treat the entity as a separate taxpayer for employment tax purposes as permitted under clause (1) of Notice 99-6. To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

Stuart Freeland

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Mr. Freeland represents businesses and institutions both as outside general counsel and in a broad range of transactions, particularly real estate related activities. His clients include a major Boston area university, real estate development firms and organizations involved in a variety of business activities. Mr. Freeland assists clients to organize and operate their businesses in a tax efficient manner.