in-20250326-IR-045250128NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE MEMORANDUM OF DECISION: 03-20221313 Withholding Tax For The Tax Year 2021 HOLDING The Department agreed with Company that it was entitled to a refund of withholding tax it remitted to the Department. ISSUE

I. Withholding Tax – Claim for Refund.

Authority: IC 6-3-4-8; IC 6-8.1-9-1; IC 23-18-1-1 et seq.; Indiana Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Single member limited liability companies, https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies; Self-employed individuals tax center, https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#selfemployed. Taxpayer protests the denial of a refund claim for withholding taxes collected. STATEMENT OF FACTS Taxpayer is an Indiana business, owned and operated by one individual (“Owner”). In tax year 2021, Owner operated Taxpayer as a limited liability company (“LLC”). Taxpayer had two employees, including Owner. As required per statute, Taxpayer remitted both its 2021 Indiana Withholding Tax Voucher (“Form WH-1”) and its Annual Withholding Tax Form (“Form WH-3”). On Form WH-3, Taxpayer requested a refund of approximately $2,100. After a review, the Indiana Department of Revenue (“Department”) denied Taxpayer’s refund request due to a discrepancy between the amount of tax reported on Form WH-1 and Form WH-3. Taxpayer subsequently filed an amended WH-3, requesting the same refund of approximately $2,100. The Department rejected the amended WH-3. Taxpayer disagreed with the refund denial and submitted a protest to that effect. An administrative hearing was held, and this Memorandum of Decision results. Additional facts will be provided as necessary.

I. Withholding Tax – Claim for Refund.

DISCUSSION Taxpayer argues it is entitled to a refund of withholding taxes it withheld in error. During the hearing, Taxpayer explained that because it elected to file as an LLC, Owner’s income from his employment by Taxpayer should not have been subject to withholding tax, and instead, should have been reported on Owner’s personal return as self-employment income. In support of its protest, Taxpayer provided copies of its Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund (“Form 941-X”) for each quarter of the relevant tax year, a corrected Form W-3, refund documentation from the Internal Revenue Service (“IRS”), Owner’s 2021 U.S. Individual Income Tax Return, and Owner’s 2021 Indiana Individual Income Tax Return. Indiana law affords taxpayers a statutory right to file a claim for refund where, “a person has paid more tax than the person determines is legally due for a particular taxable period…” IC 6-8.1-9-1(a). Additionally, “[W]hen [courts] examine a statute that an agency is ‘charged with enforcing…[courts] defer to the agency’s reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’” Indiana Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision shall be entitled to deference. Under IC 6-3-4-8(a), any employer “making payments of wages subject to tax under [Art. 6-3] . . . is required . . . to withhold, collect, and pay over income tax on wages paid . . . [and] deduct and retain therefrom the amount prescribed in withholding instructions issued by the [D]epartment.” Generally, an employer shall pay withholding taxes monthly; however, if the average monthly amount of withholding taxes for the previous calendar year does not exceed $1,000, the employer may pay the tax by calendar year instead of monthly filings. IC 6-3-4-8(b). Regarding the due date of a withholding return, “[a]n employer using a reporting period (other than a monthly reporting period) must file the employer’s return and pay the tax for a reporting period no later than the last day of the month immediately following the close of the reporting period.” Id. An LLC is “an entity created by state statute.” Single member limited liability companies, https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies, (last visited January 14, 2025). The IRS will treat LLCs as either a corporation, partnership, or as a part of the LLC’s owner’s tax return depending on elections made by the LLC. Id. Where a single-member LLC does not elect to be treated as a corporation, the LLC’s activities should be reported on its owner’s federal tax return. Id. “An individual owner of a single-member LLC…is subject to the tax on the net earnings from self[-]employment in the same manner as a sole proprietorship.” Id. IC 23-18-1-1 et seq. provides for the creation of an LLC in Indiana. Self-employed individuals “generally must pay self-employment (SE) tax as well as income tax.” Self-employed individuals tax center, https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center (last visited January 14, 2025). Self-employment tax is “similar to the…taxes withheld from the pay of most wage earners,” and is a tax that is “primarily for individuals who work for themselves.” Id. In this instant case, during 2021, Taxpayer was operating as an LLC and did not elect to be treated as a corporation. As such, Taxpayer’s income was subject to income tax and self-employment tax on Owner’s individual return. The documentation provided by Taxpayer supports its claim that Taxpayer originally withheld taxes from Owner and one employee. Owner’s Individual returns reflect he reported his self-employment income and made estimated payments based on that income. Owner’s income was, in essence, taxed twice. Owner’s income from Taxpayer should not have been subject to withholding as it was self-employment income. The 2021 Form 941-Xs provided by Taxpayer show that Taxpayer amended its withholding at the federal level to correct this error and sought a refund with the IRS, which was subsequently granted. Taxpayer made a similar correction to its Indiana return when it filed an amended Form WH-3 and requested a refund. The Department erred when it denied Taxpayer’s request for refund. Taxpayer is directed to issue a corrected Form W-2 Wage and Tax Statement reflecting that Owner received $0.00 in wages, tips, and other compensation from Taxpayer within 30 days of the issuance of this Memorandum of Decision and provide it to the Department. FINDING Taxpayer’s protest is sustained subject to it issuing a corrected W-2 Wage and Tax Statement to Owner and providing a copy to the Department within 30 days. January 31, 2025 Replaces Finding Document at: New