Partners as Employees?

[kcjenkins]

There is what looks like a good article in the November 2013 issue of The Tax Adviser

The full article is 16 pages long when I print it, and here is the beginning and a portion of the end:

EXECUTIVE SUMMARY

As partnerships increasingly offer equity interests to retain valued employees, these employees may be unaware of the employment tax consequences of receiving a partnership interest. Many partnerships continue to treat those former employees who hold partnership interests as employees for employment tax purposes, even though the IRS clearly believes these employee/partners cannot be employees.

If the IRS discovers this treatment, the possible consequences go far beyond employment tax liability. For example, it might cause a grant of an unvested partnership interest to fail to qualify for the safe harbor in Rev. Proc. 2001-43.

One solution to the tax filing complexity that employees face when they become partners would be for Congress to enact legislation allowing partnerships to file composite partnership U.S. federal income tax returns.

Conclusion

While treating a partner as an employee for employment tax withholding and remittance purposes may not seem that risky, there are real risks to that position. This article has identified some, and there are no doubt others. Until the tax laws are changed to eliminate those risks, partnerships should give careful consideration before deciding to treat any of their
partners as employees.

http://www.aicpa.org/Publications/TaxAdviser/2013/November/Pages/Brock_Nov2013.aspx

Seems to answer a question that comes up regularly.