CCA 200851105: Who owes employment taxes for a foreign disregarded subsidiary, before and after 2009

Plain-English summary

A United States parent has a foreign subsidiary organized as a single-member LLC that is disregarded for federal tax purposes. The subsidiary has its own employees and pays their wages. Who owes the employment taxes?

The email gives a three-part answer that turns entirely on timing, and it captures a rule change happening as it was written.

Under the law then in effect, a disregarded entity was not there. Its activities were treated as the owner's, so wages it paid were treated as paid by the owner, and the United States parent would be liable for employment taxes on the wages paid to the foreign subsidiary's employees. That is a striking result: the domestic parent carries employment tax exposure for workers of a foreign company it happens to own, purely because of a classification election.

That changes on January 1, 2009. From that date a disregarded entity is regarded as a separate entity for employment tax purposes. The entity, not the owner, becomes the employer for those taxes, even though it remains disregarded for income tax. This was one of the more consequential fixes in the check-the-box regime, because it aligned who owes the tax with who actually pays the wages and files the returns.

Turning off the owner's liability would ordinarily end the story, but the email flags a provision that can restore it. Section 3121(z), added by 2008 legislation and effective for services performed after 2008, treats a foreign subsidiary as an American employer where United States citizens or residents perform services under a contract with the United States government. Its target is a specific arrangement: a government contractor routing employees through an offshore affiliate so that wages fall outside Social Security and Medicare. If the provision applies, the foreign subsidiary is liable for employment taxes on those wages, and the United States parent is jointly and severally liable alongside it.

So the same parent may end up liable in either period, but for different reasons and by a different route. Before 2009 the parent is the employer, because the subsidiary is not treated as existing. After 2009 the subsidiary is the employer, and the parent is liable as a guarantor of sorts, but only for wages covered by section 3121(z).

The document is a working email rather than a considered opinion. The writer opens by saying they had inadvertently deleted the message being answered and asking for it to be resent, notes they are working from home and having trouble with email, and frames the analysis as the impression they took from a message they no longer have. The advice is phrased in conditionals throughout.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "this wouldn't apply after January 1, 2009 because after that date," with no comma before "because"; and the reference written as "3121(z)" without the section symbol on its second appearance.

Ruling snapshot

• Question: Who is liable for employment taxes on wages paid to employees of a foreign subsidiary that is a disregarded single-member LLC owned by a United States parent?
• Outcome: Advice given, informally. Under the law then in effect the United States parent would be liable; after January 1, 2009 a disregarded entity is regarded for employment tax purposes, so that result no longer applies; and where section 3121(z) treats the foreign subsidiary as an American employer for United States citizens or residents performing services under a contract with the United States government, the subsidiary is liable and the parent is jointly and severally liable with it.
• Key authorities: IRC sections 3121, 3121(z); the check-the-box entity classification regulations under section 7701.

Full text (IRS public release)

ID: CCA-102113-08 Number: 200851105
Office: ----------------------------- Release Date: 12/19/2008

UILC: 3121.00-00

From: --------------------
Sent: Thu 10/2/2008 11:35 AM
To: ----------------------
Cc:
Subject: Foreign LLC

Hi -----------

I inadvertently deleted your e-mail. Can you resend it? I am working from home today, and am having some trouble with e-mail. When I read the e-mail, I had the impression that the US parent company would be liable for employment taxes on wages paid to employees of the foreign sub if the foreign sub is a single-member LLC which is disregarded as separate from its owner. Of course, this wouldn't apply after January 1, 2009 because after that date, the disregarded entity would be regarded for employment tax purposes. After January 1, 2009, section 3121(z) may apply to treat the foreign sub as an American employer so that the foreign sub would be liable for employment taxes on wages it pays to US citizens or residents performing services under the contract with the US government. If 3121(z) applies, the US parent would be jointly and severally liable for employment taxes along with its foreign sub.

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