Guest post by Gregory Wilson, Esq.
Over the past few years, IRS Examination (audit function) undertook correspondence “audits” of several members of worker cooperatives asserting the position that the member’s patronage dividends are subject to self-employment (SE) tax. Attorney Greg Wilson fought these cases asserting that patronage dividends were not subject to SE tax for various reasons. Eventually, an attorney for the IRS – IRS Counsel’s Office – in San Francisco, asked the IRS National Office for guidance on this issue. It appears that the IRS National Office concluded that patronage dividends paid by worker cooperatives are indeed not subject to SE tax and dropped the cases where it was asserting SE tax applied to worker coop patronage. But the IRS arrived at this conclusion because they determined the worker/members are employees of the cooperative and employees generally cannot receive both employment and self-employment compensation from the same entity. Continuing with this theme, the IRS then hinted that its position might be that patronage dividends paid by worker coops should be subject to employment taxes at the cooperative level – instead of SE tax – like a bonus paid to an employee. Where the IRS is going with this now is unclear.