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.

Totally 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 don’t hesitate to call me at 973-339-7773.

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