Subsidiary Employment

[jsamans]

As you know, the IRS now requires that subsidiaries that are disregarded for income tax purposes nonetheless withhold and file employment taxes in their own right and under their own EINs. It's clear that, when an SMLLC is owned by a person, that person is not an employee of the LLC, but what happens when:

1. The subsidiary SMLLC is wholly owned by an LLC taxed as an S-Corp;
2. The S-Corp has several employee-owners; and
3. These employee-owners also do work for the subsidiary SMLLC?

I know that the 1120S will reflect the profits and losses of both companies, but do these folks get W-2s from both the parent and the subsidiary representing the different work done for each?

The SMLLC has no employees who aren't also employee-owners of the parent so I'm trying to figure out whether the SMLLC has any "employees" for reporting purposes or not. I can't find anything that says yes or no.

[Roland Slugg]

Is there a compelling reason why the subsidiary LLC needs to pay those people, rather than just have the parent LLC pay them? If there is, then yes, they would be issued a W-2 by that subsidiary LLC, since it would also be reporting their wages on forms 941/940. If they can be paid by the parent LLC, though, it seems to me it would be easier ... less paperwork.

[jsamans]

Is there a compelling reason why the subsidiary LLC needs to pay those people, rather than just have the parent LLC pay them? If there is, then yes, they would be issued a W-2 by that subsidiary LLC, since it would also be reporting their wages on forms 941/940. If they can be paid by the parent LLC, though, it seems to me it would be easier ... less paperwork.

Good question, Roland. The parent company does consulting. The SMLLC was set up to take on construction-related work that was incompatible with the parent's liability insurance, and I think the issue with employment is that the construction work needs to be covered by its own Workers Comp policy. Presumably, WC only covers actual employees.

So, okay: separate W-2s. But is it still treated as paid to an owner-employee, or is the work done for the subsidiary considered work by a non-owner?

Have you seen any specific references to this anywhere?

[Roland Slugg]

But in your OP you said the subsidiary LLC is owned my the parent LLC, not by the individuals who own the parent LLC ... i.e. its members/shareholders. So if those people work for the subsidiary LLC, they would be employees of that company, wouldn't they?

Regarding the work comp coverage, I would ask the company's insurance agent about that.

[jsamans]

But in your OP you said the subsidiary LLC is owned my the parent LLC, not by the individuals who own the parent LLC ... i.e. its members/shareholders. So if those people work for the subsidiary LLC, they would be employees of that company, wouldn't they?

Regarding the work comp coverage, I would ask the company's insurance agent about that.

Yes, that's correct: the individuals own the parent, and the parent owns the sub. And you're right that it makes sense as you put it -- but then I thought, wait. There are all of these rules that keep an S-Corp 2% shareholder from being able to get typical employee benefits, e.g. health coverage has to be included in Box 1 on the W2 and then separately deducted on the 1040, etc. Would the system really allow an S-Corp to set up a disregarded subsidiary, employ the shareholder-employees through the disregarded subsidiary where they could get regular employee benefits, and then still pass through the profits and losses?

And I am thinking "no way," but I really can't find anything that says so, and sometimes the law doesn't come out the way you'd expect, so maybe the answer is "yes." But I wish I had a reference.