What Is The Benefit Of.........?

[MsTabbyKats]

I think I'm having a senior moment, because I know that I knew this.

I don't do business/corporate returns.......

What is the benefit of a company asking an independent contractor to incorporate?

Someone asked me this...and I went blank. I'm still blank.

[Lion EA]

I think some states may have regulations requiring this so hiring company does not have to do something, workers comp, maybe. FL is one. But, for the rest, it's probably just a CYA to have a better paper trail to show they do not have to send 1099s. It may remove some liability from the hiring company, also. Probably more of a legal question than a tax question. I too do few corporate returns, so someone experienced will jump in here.

[Gail in Virginia]

If they are paying an individual, and the amount exceeds $600 they have to issue a 1099MISC but they do not have to for a corporation. Also, it is probably easier to claim that an independent contractor is truly independent if they have gone to the trouble of incorporating their business. I can't remember offhand if corporations have to be reported as independent contractors when they don't have workers compensation insurance. Those are all the reasons I can think of.

[Mr. Pencil]

What is the benefit of a company asking and independent contractor to incorporate?

Usually the request is just for an EIN, not necessarily incorporation. It's an important (but not conclusive) step in determining that a worker is not an employee. Although the difference is often explained in terms of FICA, it is also important for Unemployment Insurance Benefits, Worker's Comp, liability insurance, tax status of fringe benefits and other compensation, withholding requirements, non-competition or even patents, identity theft and illegal immigration--all sorts of things!

[MAMalody]

If they are paying an individual, and the amount exceeds $600 they have to issue a 1099MISC but they do not have to for a corporation. Also, it is probably easier to claim that an independent contractor is truly independent if they have gone to the trouble of incorporating their business. I can't remember offhand if corporations have to be reported as independent contractors when they don't have workers compensation insurance. Those are all the reasons I can think of.

For some reason, I always thought it was $600 or more.

[mcb39]

In WI, independent contractors have to be covered by WC Ins as well as contractors insurance unless they present proof of having their own insurance. I don't do corporations either, as a rule, but neither have I ever had a company ask one of my clients to incorporate. I have, however, had cases where a EIN is needed. I also agree that it is $600 or more.

[ILLMAS]

If they are paying an individual, and the amount exceeds $600 they have to issue a 1099MISC but they do not have to for a corporation. Also, it is probably easier to claim that an independent contractor is truly independent if they have gone to the trouble of incorporating their business. I can't remember offhand if corporations have to be reported as independent contractors when they don't have workers compensation insurance. Those are all the reasons I can think of.

Many of clients know about this, they always ask me if it's better for their contractors to incorporate to avoid having to give a 1099 to an individual that might trigger a payroll audit.

[kcjenkins]

You are correct. Gail should have said "and the amount exceeds $599".

A few states, FL comes to mind, automatically assume corps are not "misclassified employees".

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[mcb39]

I fail to see what is so difficult about presenting a 1099. I have contractors who work with both Corps and independents. The software makes it really simple to create 1099's and a 1096. These are the sort of things we get paid to do.

[Guest Taxed]

Don't forget to tell them that corporations are required in most states to file annual reports with the secretary of state and pay a mandatory fee. For example I have once client in CA (former MA resident) who is unfortunately paying $800 each year to the CA Franchise board for basically minimal profits.

If MsTabbyKats client is in NY that is another state with mandatory fees.

One lady who was a Sub-S corp, unincorporate a few years back because she was sick of paying the MA fees.

So don't overlook the state requirements.

[Mr. Pencil]

So don't overlook the state requirements.

And banks require an EIN for a business checking account. But a sole proprietor can get an EIN too. And nobody looking at it can tell if it is for an LLC or what. It's free and takes ten minutes, so it's a smart way to protect one's Social Security Number from getting spread around.

[Jack from Ohio]

I fail to see what is so difficult about presenting a 1099. I have contractors who work with both Corps and independents. The software makes it really simple to create 1099's and a 1096. These are the sort of things we get paid to do.

Agree. And if they are trying to avoid "...a payroll audit.", what are they trying to hide? That kind of mentality would give me pause about retaining them as a client. Fly straight, fly right with no reason to look over their shoulder.

[MsTabbyKats]

Don't forget to tell them that corporations are required in most states to file annual reports with the secretary of state and pay a mandatory fee. For example I have once client in CA (former MA resident) who is unfortunately paying $800 each year to the CA Franchise board for basically minimal profits.

If MsTabbyKats client is in NY that is another state with mandatory fees.

One lady who was a Sub-S corp, unincorporate a few years back because she was sick of paying the MA fees.

So don't overlook the state requirements.

It wasn't a client that asked....just someone I know.

He is a movie director....works on both coasts and lives in CA. He formed a corporation in MI (I think he lived there at one time) and a current client of his offered to pay him more money if he is incorporated. AFAIK...he never filed any returns for MI.

Thanks......

[Guest Taxed]

If this question was just academic then it is fine but if that movie director is looking for tax advice from you be careful about the tax credits, jurisdictional payroll tax on talent etc. It gets complicated.

[SaraEA]

A major private delivery service (NOT the one that begins with "U") for years treated most of its delivery people as independents even though they had to wear company uniforms, drive trucks with the company logo, service assigned company routes, etc. The IRS went after them because the workers failed every test the agency has for employee vs. independent contractor. When it looked like the company would lose in court (or did lose, I'm not sure), the company demanded that the workers incorporate. Most of them were sole "owners," and they were encouraged to team up with others in the area so they could share the expense of incorporating.

We have several of these as clients. It used to make me angry when I did their Sch Cs because it was so clear that they were not independents. For example, they had to pay to have their trucks washed every day at the company hub. If they were truly independent, they could have them washed anywhere or wash them themselves. Some of the ones who incorporated are still our clients. It makes me even angrier that I have to charge them for an 1120 and compliance with all the state filings (and fees). Their lot is even harder now. If one has an emergency or is sick and can't complete his or her route, the others have to cover. Before, the company covered. Same when a truck breaks down. They either rent one from the company or add pieces of the route to the working trucks. These people used to work 60 hours a week, now they average more than that.

To me this was a blantant instance of a company not wanting to pay a dime in benefits of any kind, including workers comp. When it looked like the IRS was going to force them to, they changed the rules to their advantage by requiring all the drivers to incorporate and thus prove their "independence." I sure hope the IRS and courts aren't done with them yet.

[kcjenkins]

He is a movie director....works on both coasts and lives in CA. He formed a corporation in MI (I think he lived there at one time) and a current client of his offered to pay him more money if he is incorporated. AFAIK...he never filed any returns for MI.

The point, from the payer's point of view, is that they could pay more if they did not have to pay matching payroll taxes, as well as other employee benefits. From his point of view there is no real benefit, and could be some negatives. And if he lives in CA, they will want a piece of anything he gets out of his corp,

[Guest Taxed]

>>> A major private delivery service (NOT the one that begins with "U") for years treated most of its delivery people as independents even though they had to wear company uniforms, drive trucks with the company logo, service assigned company routes, etc.

Tell me about it, I had 3 clients who worked for that company (name starts with F). Same BS that you faced. One fellow almost went belly up when his truck engine died and was forced to lease a replacement. The net profits were so low I wondered why on earth would you want to do that. Local movers in our area were making like $15 an hour min.

[MsTabbyKats]

The question was academic....but I just found out it's not a corporation....it's an LLC with only him involved.

He's not a movie director as in "Spielberg"....more at the trainee stage..... no staff involved.

Thanks for the input.........

[joelgilb]

If they are paying an individual, and the amount exceeds $600 they have to issue a 1099MISC but they do not have to for a corporation. Also, it is probably easier to claim that an independent contractor is truly independent if they have gone to the trouble of incorporating their business. I can't remember offhand if corporations have to be reported as independent contractors when they don't have workers compensation insurance. Those are all the reasons I can think of.

Like Gail said, it helps to justify the independent contractor status vs employer - employee relationship. It also helps the contractor to deduct business expenses where they would not exceed the 2% itemized deduction limitation or if they can't itemize.