Sec. 1706 of the Tax Code

[David Schwartz]

You’re assessment is not quite accurate.

What 1706 does is make the risk of hiring independent contractors unreaonably high, so they prefer to offset that risk onto 3rd-parties.

I’ve been with firms that refuse to hire contractors who are LLCs like you describe as well, because they’re really no better from a risk standpoint than hiring sole proprietors, and in some ways they’re even worse. (A company can win a lawsuit and judgment against an LLC, and end up getting a “charging order” for the LLC that puts them at risk for paying current-year taxes on their ostensible “income” earned by the LLC while the LLC owner(s) can literally take years to distribute anything to them.)

I think a far better solution would be to for a group of people to get together and become shareholders and employees in a normal C Corp (“employee-owned and operated”!), then use that entity to contract with clients. One benefit of this is that it could set up typical Group benefits plans for insurance and retirement needs.

This is what many enterprising foreigners have done as a means of funneling folks from their home towns over here to America under the H-1B visa program. They end up taking the lion’s share of the fees charged and only pay their employees a pittance. But the employees are getting quite a bargain in the process, namely permanent employment for 7-10 years, and ultimately a green card.

The motivations and resulting dynamics for a bunch of US Citizens to do this aren’t nearly as well-defined, and the people involved would be far more likely to act like a herd of cats with their own interests and demands.

Which is probably why we see very few such entities compared with those owned by foreigners.

-David "The Tool Wiz" Schwartz



> On Dec 8, 2016, at 10:01 AM, Keith Smith <techlists at phpcoderusa.com> wrote:
> 
> 
> David, you have brought up Sec. 1706 of the Tax Code several times over the years.  I am not familiar, however from what you describe it sounds like it prohibits a programmer from becoming a sole proprietor, however it sounds like it does not stop agencies from doing contract work.
> 
> What is an agency?
> 
> I'll read Sec. 1706 of the Tax Code when I get done with my current project and have more time.
> 
> Sounds like the solution is to form an Limited Liability Company (LLC). My accountant says it is legitimate to form an LLC and be a one man band and to have only one client.  He say that is a legit business.
> 
> Forming an LLC in AZ is simple.  Fill out the forms the state provides pay your fee with the filing and publish.  I think it costs about $85 and takes 3 or 4 hours (for a beginner) over about 6 weeks.
> 
> Anyone have any thoughts?
> 
> -- 
> Keith Smith
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