Disregarded entities' liability for excise and employment taxes.

Qualified subchapter S subsidiaries (QSubs) and certain other single-owner disregarded entities would be responsible for paying employment and excise taxes under new IRS guidance. According to the Service, the proposed rules (REG-114371-05,10/17/05) would treat those disregarded entities as separate, "regarded" entities for purposes of paying and reporting Federal employment and excise taxes, a shift from the existing system. The rules would apply to QSubs and single-owner eligible entities disregarded for Federal tax purposes under Sec. 7701.

Big change: The proposed roles are a significant change from the current structure. Under existing rules, either the disregarded entity or its owner can calculate and pay these taxes, but the ultimate responsibility for them remains with the entity's owner. By contrast, the new guidance would shift employment and excise tax responsibility entirely to the affected disregarded entities. Disregarded status would be eliminated for these entities for this limited purpose, although it would continue for other Federal tax purposes.

The change means entity owners would no longer be responsible for excise and employment taxes at all.

Easing compliance: The IRS proposed this change because the existing system, allowing payment and calculation of tax by either the entity or its owner, has caused significant difficulties for both taxpayers and the government.

According to the regulations' preamble, "[t]he Treasury Department and the IRS believe that treating the disregarded entity as the employer for purposes of federal employment taxes will improve the administration of the tax laws and simplify compliance."

Under the proposed rules, a disregarded entity would become liable for employment taxes on wages paid to its employees. It also would be responsible for backup withholding, making timely deposits of taxes, filing returns and providing wage statements to employees.

The IRS said the regulations' employment tax provisions are proposed to apply to wages paid on or after January 1 following the date the regulations appear in the Federal Register. Until that time, affected entities can continue to use Notice 99-6. If the owner currently satisfies its subsidiaries' employment tax obligations, it must continue to do so until Notice 99-6 is invalidated.

For excise taxes, the new rules are proposed to apply to liabilities imposed and actions first required or permitted in periods beginning on or after January 1 following the date the rules are published as final. Until that point, owners will be treated as meeting their excise tax obligations, if they are satisfied either by the owner or by the disregarded entity on the owner's behalf.

Lesli S. Laffie, J.D., LL.M.