Final Rules Involve Disregarded Entities, Indoor Tanning Tax, and FICA and FUTA Exemptions

The IRS issued T.D. 9670 on Wednesday, which finalizes rules on the disparate topics of disregarded entities that collect the excise tax on indoor tanning and how certain exceptions from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes work when a disregarded entity is involved.

Indoor tanning services

First, the new regulations treat disregarded entities (including qualified subchapter S subsidiaries (QSSTs)) as separate entities for purposes of the excise tax on indoor tanning services. They finalize proposed regulations issued on June 25, 2012, and withdraw temporary regulations issued at that time. This rule means that a Form 720, Quarterly Federal Excise Tax Return, reporting indoor tanning excise tax, must be filed using the name and employer identification number of the disregarded entity and not that of the entity’s owner. (For a discussion of the indoor tanning excise tax rules, see “Indoor Tanning Tax Final Regulations Issued.”)

FICA and FUTA

The second part of the new regulations involves the exceptions from FICA and FUTA afforded for certain family employment and for employers and employees whose religious faith opposes Social Security taxes. Before 2008, the owner of a disregarded entity was treated as the employer for employment tax purposes.

In 2009, the rule was changed to treat disregarded entities as separate entities for employment tax purposes, and the exceptions for family employment and religion were no longer available if the employer was a disregarded entity. In 2011, the IRS issued proposed and temporary regulations that extended the religious and family member FICA and FUTA tax exceptions to disregarded entities and also clarified that the backup withholding rules of Sec. 3406 continue to apply to the owner of the disregarded entity, except a QSST. Wednesday’s regulations finalize those 2011 proposed regulations and withdraw the temporary regulations.