Sec. 1706 of the Tax Code

[Keith Smith]

Sounds like one needs to be an employee of their own LLC to solve the 
negative aspects of Sec. 1706.


 From https://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986

Tax treatment of technical service firms employing certain professionals

The Internal Revenue Code does not contain any definition or rules 
dealing with the issue of when a worker should be characterized for tax 
purposes as an employee, rather than as an independent contractor. The 
tax treatment depends on the application of (20) factors provided by 
common law, which varies by state.

Introduced by Senator Daniel Patrick Moynihan, Section 1706 added a 
subsection (d) to Section 530 of the Revenue Act of 1978, which removed 
"safe harbor" exception for independent contractor classification (which 
at the time avoided payroll taxes) for workers such as engineers, 
designers, drafters, computer professionals, and "similarly skilled" 
workers.

If the IRS determines that a third-party intermediary firm's worker 
previously treated as self-employed should have been classified as an 
employee, the IRS assesses substantial back taxes, penalties and 
interest on that third-party intermediary company, though not directly 
against the worker or the end client.[9] It does not apply to 
individuals directly contracted to clients.[10]

The change in the tax code was expected to offset tax revenue losses of 
other legislation Moynihan proposed that changed the law on foreign 
taxes of Americans working abroad.[11] At least one firm simply adapted 
its business model to the new regulations.[12] A 1991 Treasury 
Department study found that tax compliance for technology professionals 
was among the highest of all self-employed workers and that Section 1706 
would raise no additional tax revenue and could possibly result in 
losses as self-employed workers did not receive as many tax-free 
benefits as employees.[13]

In one report in 2010, Moynihan's initiative was labeled "a favor to 
IBM."[14] A suicide note by software professional Joseph Stack, who flew 
his airplane into a building housing IRS offices in February 2010, 
blamed his problems on many factors, including the Section 1706 change 
in the tax law while even mentioning Senator Moynihan by name, though no 
intermediary firm is mentioned, and failure to file a return was 
admitted.[15]


- - -

Keith




On 2016-12-08 08:01, Keith Smith 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