Sec. 1706 of the Tax Code

[David Schwartz]

I’m not sure what the point of these “Rah Rah for LLC!” posts is all about. Nobody has said anything to the contrary.

This list is primarily for people who work in the "high tech" (i.e., computing) industry, which is SPECIFICALLY what Sec. 1706 of the Tax Code deals with.

If you’re in Real Estate, Accounting, Architecture, or whatever, 1706 does not apply to you. It’s very, VERY NARROW in its applicability — BY DESIGN.

Sec. 1706 eliminates the “safe harbor” provisions for people who work as contractors, eliminating any “benefit of the doubt” that is historically given in most other professions, and instead subjects workers and the companies that employ them to a vague 22-point (IIRC) series of questions that an IRS Auditor can use to establish whether someone should be (or should have been) regarded as a “contractor” or “employee” for tax purposes.

The problem is, this is not something that is adjudicated when you hire on, and it does not matter how many reams of paperwork you sign that says it’s one thing or the other.

It’s a ticking time-bomb that applies in the vast majority of cases 3-5 years AFTER THE FACT when the person — usually hired as a contract worker at the time — is audited by the IRS for whatever reason, and the auditor reviews one of his employment situations and subjects it to the 22-point “test”. If he rules the person was acting as a “contractor”, all is fine. 

But if he rules the person should have been treated as an “employee”, both the person and the erstwhile “employer” just got nuked.

The back-due taxes assessed to the “employer", plus accrued penalties and interest, typically amount to far more than whatever the person was paid. The company has no knowledge anything went awry until they suddenly get a bill from the IRS. 

Meanwhile, the person in question now has to “unwind” any business expenses and deductions, as well as anything that depended on them such as retirement contributions, FICA/FUTA/UI set-asides, etc. Everything is up-ended and needs to be re-filed. 

And to add insult to injury, the same auditor is likely to flag previous and subsequent years for auditing as well, and what do you think he’s going to rule on other contract gigs that were fundamentally the same situations as the first one he nuked? 

Again, if you’re not in the high-tech industry, this does not apply to you. 

Having a single-member LLC stand-in to protect you against such situations can be helpful, IF the company you want to work with is willing to hire you. Many are not because of problems discussed in other threads.

-David "The Tool Wiz" Schwartz



> On Dec 8, 2016, at 4:53 PM, Vara La Fey <varalafey at gmail.com> wrote:
> 
> Yes, you can be the only user ("Manager" and "Member") of an LLC. I did it for years in real estate, and still have my LLC.
> 
> IIRC the form takes more like 5 min. You publish your intended LLC in the Record Reporter for 6 weeks. I forget the cost, but it's fairly cheap and easy. And IIRC, the Sec of State office (or wherever I went) has a form for that too.
> 
> LLCs are almost zero maintenance and are not sublect to hostile takeover. And so easy that some real estate investors create one for each property, just to keep properties legally isolated from each other for basic liability reasons. An LLC name like "<street address>, LLC" is one of those. (So named cause the investor realized that pretty names would be silly and confusing.)
> 
> Good luck!!  :-)
> 
> - Vara
> - www.facebook.com/vara.lafey <https://u2206659.ct.sendgrid.net/wf/click?upn=tzJbcg2o-2FNh3kfIF32sRUUEfAUrPlRdODloCrKUTDLEe1Xr5sB7TGzxKSs-2BD8fg9_6lpMB7VLnN-2Fj9-2FEErg8-2F-2BMBpb5QxlByTgv2M3fbWD9ebvC-2BWrN3h7jImK8EVWYBeAxMmDgWQUd2i68p21gEHYM-2FoQgensqEd7za99TtrLWJAbeTdUkMUGU8Vo7YWEOuWYyKpRsYEzhH80ayCmjBNyRegRv1YQqsEIoX6kKAKaYqnMjlU3p3AJUL0FpMDQO44mekFJNdet0cFtb3kLTaz4bJ9ssqfjOqK0HTvvYpT-2FcM-3D>
> 

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