To overcome getting shorted on the Section 199A deduction or being denied fringe benefits, some sole proprietors and partners instruct their payroll services to make them W-2 employees.
When the payroll services do this, the proprietors and partners believe they are now legitimate employees of their proprietorships and partnerships. Wrong.
The sole proprietor is not a W-2 employee of the proprietorship. He or she is self-employed and operates under the rules for the self-employed.
The partner is not a W-2 employee of the partnership. He or she is a partner and is treated as a partner under the tax rules. Partners receive remuneration for services as guaranteed payments, which are subject to self-employment taxes.
Using a Certified Professional Employer Organization (CPEO) does not create the possibility of paying a W-2 wage to a partner or a sole proprietor.
If you would like to discuss fringe benefits, the Section 199A tax deduction, and/or your W-2 status, please do not hesitate to reach out to your team at Luster Tax Consulting to work through this with you. Please use the following link to book your complimentary strategy call with your team at Luster Tax Consulting.