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            THE BAD NEWS:  On September 25, 2008, the Ninth Circuit Court of Appeals issued its opinion in Kandi v. United States, upholding the employment tax liability of an owner of a single-member LLC.  Kandi v. United States, 2008 WL 4429296 (9th Cir. 2008).  The Ninth Circuit acknowledged that the IRS recently adopted new regulations that shift the primary liability for single-member LLCs’ employment taxes onto the entity.  The Court, however, concluded that these regulations will not be effective until January 1, 2009, and do not apply retroactively.  The Court held that under the effective IRS regulations, the owner of the single-member LLC is primarily liable for the LLC’s employment taxes.

            THE GOOD NEWS:  Under new IRS regulations that will be effective as of January 1, 2009, the IRS will treat single-member LLCs (and other “disregarded entities”) as separate entities for the purposes of paying employment taxes and certain other excise taxes under subtitle C of the Internal Revenue Code.  T.D. 9356, 2007-39 I.R.B. 675.  Once effective, the disregarded entity will be primarily liable for income tax withholdings, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes.  However, an individual owner of a disregarded entity will continue to be treated as self-employed for purposes of the Self-Employment Contributions Act (SECA).  SECA taxes are basically a business owners’ version of the FICA taxes that employees pay.

            THE CAVEAT:  While the LLC owner will not be primarily liable for the employment taxes of a single-member LLC after January 1, 2009, the LLC owner may still have liability for the LLC’s employment taxes as a “responsible person.”  An owner’s liability would only arise if the entity was unable to pay the tax.