Sending Office: Honorable Jared Polis
Sent By:


Request for Signature(s)

Dear Colleagues,

Please join myself and Rep. Pocan in sending a letter to IRS Commissioner Koskinen asking him to clarify the IRS’ position on the tax treatment of patronage dividends received by cooperative employee-owners. Cooperatives are a type of employee-owned business
structure. A member of a cooperative will receive patronage dividends or distributions based on the earnings of a cooperative and the members’ ownership share. Worker cooperatives are cooperatives where the members are also the employees receiving W-2 income.

The IRS has never issued guidance on the appropriate treatment of patronage dividends paid to worker cooperative employee-owners. As a result, employee-owners are often subject to unnecessary and time consuming audits by the IRS and at times, the IRS has
classified the patronage dividends as self-employment income. It is clear, based on the IRC and IRS tax court decisions that patronage dividends are not self-employment income and therefore, patronage dividends should not be treated as such.

Please join us in asking that the IRS take affirmative steps to clarify that patronage dividends of worker cooperatives to employee-owners are not self-employment and ask the IRS to issue appropriate guidance to employee-owners on how to enter patronage
dividends on their tax returns to eliminate costly, unnecessary and time consuming audits.

If you would like to co-sign this letter, please email Hilary Gawrilow at
with Rep. Polis by COB Thursday, July 13th. The text of the letter is below:


Rep. Jared Polis (D-CO)

Rep. Mark Pocan (D-WI)


Dear Commissioner Koskinen,

We are writing to you to express our concern regarding the tax treatment of patronage dividends paid to employee-members of cooperative businesses.[1] The IRS’ position, on certain occasions, has subjected patronage
dividends paid to employee-members of worker cooperatives to self-employment tax. We are concerned about the imposition of self-employment tax on patronage dividends made to employee-members who are receiving a fair market wage and a W-2 and believe that this
designation is both incorrect and treats worker cooperatives unfairly.

As you are aware, in many instances worker cooperatives are employee-owned businesses, wherein all members are W-2 employees.  In certain other cases and when appropriate, worker cooperatives are still worker-owned, but the workers are classified as 1099
independent contractors. As an employee of the cooperative, any employment wages the individual receives would be subject to both employment and income tax and as a member of the cooperative, the member may also receive patronage dividends. Patronage dividends
provided to cooperative members are conditional upon their ownership in the cooperative and are based on their “patronage” of the cooperative, as that term is defined in Subchapter T of the Code. The distributions are paid out of gross earnings of the cooperation
and, while they may be deductible to the cooperative under Subchapter T, they are not paid as a form of additional compensation or bonus related to the employee-members’ work performance. Employee-members receive a 1099-PATR from the cooperative which is reported
on the members’ individual tax return. In essence, for income tax purposes these distributions paid to employee members are similar to stock dividends and should not be subject to self-employment tax.

Employee members of a worker cooperative have two relationships with the business – employee and owner. They are not and by definition cannot also be independent contractors for the cooperative. The employee members do not sell any goods or services through
the cooperative and their role with the business is not an extension of another business they operate. Therefore, wages received as a result of their employment to the cooperative are treated as employment income and patronage dividends paid as a consequence
of their membership in the cooperative should not be subject to self-employment tax.

Self-employment tax applies to income derived by an individual from any trade or business carried on by such individual.[2] The trade or business must be carried on personally by the taxpayer.[3]
Further, the statute and IRS regulations clearly state that that dividends paid on stock of any corporation are not subject to self-employment tax.[4] For individual income tax purposes, the patronage dividends
paid by a worker cooperative are dividends paid on its stock held by its members and, thus, should not be subject to self-employment tax.

Since Subchapter T of the IRC, governing cooperatives, was enacted in 1962, the IRS has never articulated a clear policy regarding the tax treatment of patronage dividends for worker cooperatives nor developed any publically available guidance.[5]
The lack of guidance from the IRS on the appropriate tax treatment for patronage dividends perpetuates unnecessary and costly audits of employee-members. Often, employee-members who receive 1099-PATRs enter the patronage distributions as “other income,” on
their tax returns because there is no clear way to actually enter the patronage dividends on IRS Form 1040 Schedule B. Clarifying Form 1040 Schedule B will help reduce confusion by employee-members and enable them to accurately report their patronage dividends
on their tax returns. Further, the IRS should develop guidance clarifies that patronage distributions made to employee-members of worker cooperatives are not subject to self-employment tax.

Worker cooperatives differ from other types of cooperative the IRS may be more familiar with, such as agriculture cooperatives. The nature of worker cooperatives and the nature of the relationship of the patrons of worker cooperatives are fundamentally different
from other types of cooperatives. It is critical that the IRS recognize these differences to ensure that worker cooperatives and their members are treated fairly.

We appreciate your consideration of this important issue and look forward to your response. If you have any questions, please feel free to contact Hilary Gawrilow ( with Rep. Polis and Sydney Terry (
with Rep. Pocan.


[1] For the purposes of this letter, the term “employee-members,” refers to an individual who is both a member of the worker cooperative and employee of the worker cooperative receiving a W-2 as an employee.

[2] IRC §1402(a)

[3] IRS Reg. 1.1402(a)-2(b).

[4] §1402(a)(2); IRS Reg. 1.1402(a)-5

[5] IRC §§1382-1388 relates to the tax treatment of cooperatives, including tax treatment of patronage dividends to patrons of cooperatives and defines patronage dividends.

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