Could anyone help me get a LLC started? My boss suggested it to make things easier, etc.

[janetvj]

Originally Posted by Randomdude

Its not illegal at all. Its actually fully legal, and its a huge lightning rod of debate in this country.

It is illegal to set up a separate business entity for the sole purpose of avoiding tax. There must be some other legitimate business need besides the tax benefit. In addition, there are very specific criteria for determining whether someone is an employee or independent contractor. The IRS, as well as many states, look very closely at this issue, and there is case law on the subject. If the facts support that the individual is actually an employee, he or she cannot be treated as an independent contractor, and the employer is liable for any tax deficiency that results.

[Randomdude]

Originally Posted by janetvj

It is illegal to set up a separate business entity for the sole purpose of avoiding tax. There must be some other legitimate business need besides the tax benefit. In addition, there are very specific criteria for determining whether someone is an employee or independent contractor. The IRS, as well as many states, look very closely at this issue, and there is case law on the subject. If the facts support that the individual is actually an employee, he or she cannot be treated as an independent contractor, and the employer is liable for any tax deficiency that results.

1. Good luck proving that that the company was set up solely to avoid tax. Any LLC can be used as a service company employing the person who is actually doing the labor. Almost every person I know who has an LLC is using it for mostly the purpose of avoiding payroll taxes on large parts of the companies income. I know many people who have dozens of LLC's piggybacked off each other, with one LLC owning other LLCs.

2. As long as the original company is not controlling the 1099 employee, its pretty much impossible to prove an employee relationship. He could be a landscaper, and as long as he was only paid by the job, and used his own tools, he could be a 1099 employee. Its that simple. The company could even skirt around that even more by not requiring him to use his own tools but "renting" their tools to him. The only thing in this scenario that would be the hang up is the health insurance. If he continues to be under the company group insurance, yeah, it can then be proven that they are simply trying to avoid taxes.

[janetvj]

Originally Posted by Randomdude

1. Good luck proving that that the company was set up solely to avoid tax. Any LLC can be used as a service company employing the person who is actually doing the labor. Almost every person I know who has an LLC is using it for mostly the purpose of avoiding payroll taxes on large parts of the companies income. I know many people who have dozens of LLC's piggybacked off each other, with one LLC owning other LLCs.

2. As long as the original company is not controlling the 1099 employee, its pretty much impossible to prove an employee relationship. He could be a landscaper, and as long as he was only paid by the job, and used his own tools, he could be a 1099 employee. Its that simple. The company could even skirt around that even more by not requiring him to use his own tools but "renting" their tools to him. The only thing in this scenario that would be the hang up is the health insurance. If he continues to be under the company group insurance, yeah, it can then be proven that they are simply trying to avoid taxes.

Simply because people are able to get away with something doesn't make it legal. And, as I said before, there is specific criteria involved in determining whether a worker is an employee or an independant contractor. That doesn't mean that there is no such thing as an independent contractor, just that an employee may not masquerade as one in order to avoid tax. If the person is under the control of the employer as to how the job is to be done, and when it is to be done, if the employer supplies the tools, if the person must perform the work personally, if the employer bears the risk for the work running over the estimate, or for any liability for damage or injury...etc., etc. There is an entire division within the IRS that audits for this. Yes, many businesses get away with it. But that doesn't mean it's okay to do it.

[subsound]

Originally Posted by Randomdude

Its not illegal at all. Its actually fully legal, and its a huge lightning rod of debate in this country.

It's a technicality of the law that gets abused by a number of companies, actually Fedex was just busted for it recently as well. Small employers can get away with with it because often it doesn't blip on the governments radar, but often it doesn't help the employee as much as it helps the company. Doing it this way will get the company in trouble more then the employee, but often the emplyer abuses this kind of relationship because of the fewer protections independant contractors have, and the more expensive the recourses are to solve them, then in an employee relationship.

If it's just so that he can receive health insurance and deduct it on his personal taxes, and the level of control and duties are the same...it fails the smell test like a dirty chicken farm. You don't have to beleive me, run it by a corporate lawyer and see the dirty look they give you...or read it up in West's B-Law text on Employee/Employer relationships, it's got an example just like this in the text (I have the 11th edition, probably a new one out by now).

[StoneOne]

If the OP is going to maintain the same relationship with the employer, then it is a very bad idea to take the risk of "official" contractor status, which an LLC would confer. If, however, the OP is seriously going to treat his soon-to-be-former employer as a client and operate independently, then all's well. But the OP needs to be able to work for whomever he wants, do work on his own time and how he sees fit. The only thing the now client can demand of him is timely and professional delivery of the ordered product or service. Nothing more. If the OP can somehow stay on the employer's group health plan, more power to him, although I suspect that this might put additional burden on both parties to actually prove the client-contractor relationship. I'm not a lawyer, but it might be worth exploring whether it's a good idea to draw up an official severance agreement that allows the OP to stay on the group health plan indefinitely.

OP, let us know what you decide to do and how it goes.

By the way - no need to use those e-filing sites or any other service to start up an LLC. Very easy to do the paperwork yourself.

[Randomdude]

Originally Posted by subsound

If it's just so that he can receive health insurance and deduct it on his personal taxes, and the level of control and duties are the same...it fails the smell test like a dirty chicken farm. You don't have to beleive me, run it by a corporate lawyer and see the dirty look they give you...or read it up in West's B-Law text on Employee/Employer relationships, it's got an example just like this in the text (I have the 11th edition, probably a new one out by now).

Oh yeah, I agree, if he has the exact same duties as when he was an employee, and is still on the group health insurance, it definatley fails the test. The thing is, the first company just needs to alter a small number of things to make this perfectly legal. Just pay him by the job, make him use his own tools, etc. Its not much to change an employee in to a legit 1099 case.

[janetvj]

StoneOne makes a very good point. A true independent contractor relationship means that the OP would also be able to work for others without recourse or restriction by the "client".

[emilybh]

Originally Posted by Randomdude

Actually, if he set up an LLC, hed be an employee of his LLC. If he was simply a 1099 vendor, he would not get the distribution tax benefits of the LLC, namely shielding the distribution income from payroll taxes.

Now, Im not sure if they could include him in a group policy if he was not a 1099 employee, however, from what his boss is saying, that may be possible where he is at.

Actually LLCs and S-corps are the WORST business entities available for taking advantage of tax benefits related to health insurance. You are MUCH better off just remaining self-employed or if you are big enough doing a C-Corp.

LLCs and S corps allow the business to take the deductions for the insurance but then the cost of the insurance is passed along and added in as wages on the individual tax return. Additionally it costs money to set up the LLC and S-Corp.

Being self employed or a C corp you can take advantage of Section 105 plans and HRAs. With S-corps and LLCs the greater the 2% shareholders can NOT participate. Therefore if you do do an S-Corp or LLC you have absolutely NO incentive to spend any more on health insurance than you have to because it will just be added in as wages on your individual return.

I always recommend HSA plans to those with these entities because they are the only types of health plans that besides providing 100% coverage for everything including Rx after you met your deductible (unlike co-pay plans), also have tax advantages if you make contributions into the side Health Savings Account that you can benefit from on your individual return.

[Randomdude]

Originally Posted by emilybh

Actually LLCs and S-corps are the WORST business entities available for taking advantage of tax benefits related to health insurance. You are MUCH better off just remaining self-employed or if you are big enough doing a C-Corp.

Im not talking about anything related to health insurance, Im talking about the payroll taxes.

Originally Posted by emilybh

LLCs and S corps allow the business to take the deductions for the insurance but then the cost of the insurance is passed along and added in as wages on the individual tax return. Additionally it costs money to set up the LLC and S-Corp.

It reduces pass through income, and raises wages......I fail to see a tremendous downside. You reduce $500 in income, and add $500 in wages. For any LLC which is actively managed and participated in by the owner and requires payroll taxes on pass through income, this wouldnt matter in the slightest.

Originally Posted by emilybh

Being self employed or a C corp you can take advantage of Section 105 plans and HRAs. With S-corps and LLCs the greater the 2% shareholders can NOT participate. Therefore if you do do an S-Corp or LLC you have absolutely NO incentive to spend any more on health insurance than you have to because it will just be added in as wages on your individual return.

1. C-corps can are subject to double taxation on income AND cannot just be randomly set up. There is a whole laundry list of qualifications to set this up.

2. Self employed as in sole proprietorship is a joke. Only an idiot would do this. It subjects you to unlimited liability, AND you get the added benefit of paying full payroll taxes on every penny you make (except social security is limited if you make enough).