Fringe Benefits for Sole-Proprietors, LLCs & Partnerships

May 14, 2019

Written by TaxSpeaker
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We have instructed for years that the sole proprietor Schedule C and F owners may not pay themselves wages. We have also instructed that LLC’s and partnerships that file Form 1065 may also not pay themselves wages. (Rev. Rul. 69-184, 1969-1 C.B. 256 established that an individual may not be an employee of his partnership.)

One of the biggest problems we professionals face is telling clients that one of their other professionals is wrong, and I am constantly battling the national payroll companies that tell our Sch. C/F/1065 to pay themselves a wage. We are also beginning to see folks assigning the owners of Sch. C/F/1065 to a PEO (Professional Employment Organization) so as to then get around this rule (they think) and pay themselves wages.

In CCA 201916004 the IRS addressed the continuing problem of sole proprietors trying to break the law and pay themselves a wage through a CPEO (Certified Professional Employment Organization) in order to obtain fringe benefits. A CPEO can't be used to transform a self-employed individual or a partner in a partnership, who are not entitled to receive fringe benefits that are limited to employees, into an employee eligible to receive such benefits. Self-employed individuals or partners in a partnership should not be receiving Form W-2s or fringe benefits from a CPEO since they are not employees.

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