A cooperative with employees will need to pay employment taxes. The IRS has said members do not need to pay self-employment taxes on their patronage dividends.
Employment tax
If member owners of a cooperative choose to treat themselves as employees and/or if the cooperative has employees working for the cooperative who are not members, then the cooperative must pay employment tax for every worker that is an employee. For California cooperatives, see CORP § 12253.5. Besides paying income tax based on what a business earns, a business must pay employment taxes based on the wages it pays to its employees. Employment taxes include Medicare, Social Security, and unemployment insurance. For California-specific employment tax rules, see EDD’s California State Payroll Taxes webpage.
Self-employment tax and patronage dividends
If you are self-employed, you pay self-employment tax (Medicare and Social Security) based on your self-employment income. The IRS defines self-employment income as the income that an individual earns from a trade or business carried on by that individual.
The IRS said that, in cases where members of a worker cooperative are employees, employees generally do not receive both employment income and self-employment income from the same entity. For now, the IRS has not ruled that 1099-PATR are not subject to self-employment tax. This leads to the possibility that the IRS might conclude that patronage dividends are employee bonuses. If this is true, the worker cooperative may have to pay employment tax on patronage dividends, since employee bonuses are considered employee wages. Wegner CPAs note that there isn’t clear guidance on the reporting of income from 1099-PATR for worker co-op owners on personal tax returns. They outline options for reporting this income that aim to comply with tax law while also taking advantage of available tax deductions, such as the Qualified Business Income (QBI) deduction.
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How Money Flows Through a Cooperative
The way money moves from clients to the cooperative, to the worker owners and shareholders is based on the value of community wealth building. The system that keeps any value generated by individuals (such as profit, labor, etc.) within the co-op and distributed back to those individuals is called patronage. Sometimes, members are even called
