Preface: Form 4029 Exemptions from FICA taxes can result in a tax landmine of penalties and back tax assessments in certain circumstances. Appropriate application of the tax code can minimize risks. What is permitted and what is not according to the IRS tax code?
What Affect Does Form 4029 Have on Partnerships and Sole Proprietorships?
Credits: Jake Dietz, CPA
Do you want to avoid paying Social Security and Medicare taxes by taking advantage of your form 4029 exemption? If so, entity type and ownership play important roles in avoiding these taxes. Even valid exemptions do not apply in certain situations. This blog addresses how form 4029 affects payroll taxes for sole proprietorships, partnerships, LLCs taxed as one of the previous two options, and corporations. Entity type and ownership play important roles in Social Security and Medicare tax avoidance.
First, here is a little information on Form 4029. It is the “Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits.” Approved forms allow both the employer and employee to avoid Social Security and Medicare taxes if certain conditions are met.
Sole Proprietorships and Single-Member LLC Disregarded Entities
A sole proprietorship is owned by one person and unincorporated. A single-member LLC (SMLLC) is an LLC owned by one member. It is a disregarded entity for federal tax purposes, unless an election is made to be taxed as a corporation. An SMLLC may therefore have the same federal tax treatment as its owner. Sole proprietorships and SMLLCs not taxed as corporations do not need to pay Social Security and Medicare payroll taxes for each employee with a valid form 4029 if the owner also has a valid form 4029.
For example, suppose Reuben is the sole owner of Silver Maple Furniture & Ice Cream Shop, LLC. The LLC never elected to be taxed as a corporation. The LLC hired Amos and George. Both the owner Reuben and employee Amos have form 4029s, but George does not. In the above scenario, the employer would be exempt from paying the employer portion of Social Security and Medical payroll taxes on Amos, but would have to pay those taxes on George. Amos would be exempt from paying the employee portion of Social Security and Medicare payroll taxes, but George would have to pay those taxes on his wages.
If the owner does not have a valid form 4029, then Social Security and Medicare payroll taxes are paid on all employees. This rule applies even if each employee obtained a valid form 4029.
Let’s take the example above and change the facts slightly. George (no 4029) buys the SMLLC from Reuben, and George employs Reuben (valid form 4029) and Amos (valid form 4029). In this situation, all Social Security and Medicare payroll taxes are due, since the employer does not have a valid form 4029.
Partnerships and LLCs Taxed as Partnerships
Form 4029 applies to a partnership or LLC taxed as a partnership if each member has a valid form 4029. If one member has a valid form 4029 and another member does not, then the exemption does not apply to partnership wages.
Let’s assume that Reuben (valid form 4029) decides to bring Amos (valid form 4029) into Silver Maple Furniture & Ice Cream Shop, LLC as another member. Because all the members have valid form 4029s, then each employee that has a form 4029 would also be exempt. If the LLC wanted to hire Justin (valid form 4029), then no Social Security and Medicare taxes would be due on Justin. Both the employer and George, however, would have to pay Social Security and Medicare taxes on George’s wages because he does not have a valid form 4029.
Alternatively, let’s consider what would have happened if Reuben (valid form 4029) brought George (no 4029) into the LLC instead of Amos (valid form 4029). In that situation, all Social Security and Medicare payroll taxes are due because not all the members are exempt.
The form 4029 exemption does not apply to corporations, or to its employees. Social Security and Medicare taxes are due even if the owner and all employees each possess a valid form 4029.
For a form 4029 to take effect, all owners must have valid form 4029s, and the entity must not be a corporation. Furthermore, the exemption only applies to employees that also have a valid form 4029.
Entity type and ownership can affect Social Security and Medicare taxes, and should therefore be factors in the decision-making process. Also, an employee with a form 4029 may want to ask potential employers before accepting a job if the employer is exempt. Contact your tax accountant if you would like help exploring how form 4029 is affected by entity type and ownership.