Working As Independent Contractor for My Own LLC

[jpearsall187]

My question involves business law in the state of: Florida

I just set up an LLC and filed for subchapter S classification for tax purposes. The LLC will only involve myself and serves to provide relief and emergency services to veterinary hospitals (I do not have a hospital myself. I am serving as an independent contractor of sorts. The businesses will pay my company, and I will technically not be an employee of them). My question is this: can I set it up so that I actually serve two different functions for my LLC? Can I designate one job as a part-time business manager for my LLC for which my company will pay me a wage of lets say 15,000 dollars per year. Can I then also serve as an independent contractor for my own LLC? I figured that by setting it up like this, it would reduce the amount of employment taxes I pay to myself through wages to me as a part-time business manager because I could pay myself less than if I was paying myself a wage as a medical consultant. I could then also pay myself as an independent contractor for the medical services with an independent contractor fee, which would not be subject to state employment taxes. In addition, while I have to pay self-employment tax on the independent contractor fee, I could pay myself a lower fee as an independent contractor, and also, 50% of the self-employment tax I pay can be used as an adjustment to income to lower income taxes. Thanks.

[adjusterjack]

No.

It's a cockamamie idea that isn't going to fly with the IRS or state taxing authority.

I suggest you talk to a business attorney and a CPA before you do something that might land you in jail for tax evasion.

[llworking]

No.

It's a cockamamie idea that isn't going to fly with the IRS or state taxing authority.

I suggest you talk to a business attorney and a CPA before you do something that might land you in jail for tax evasion.

I agree. As a working member of an LLC which has elected S-corp status you are required to pay yourself a fair market wage for the work that you do for the corporation. Any profits in excess of that fair market wage will flow through to your personal return on Schedule K-1 and will not be subject to social security and medicare taxes. Paying yourself a fair market wage is critical.

If your company has net earnings of 100k and you pay yourself a wage of 15k you have a serious problem. If your company has net earnings of 100k and you pay yourself a wage of 80k then you are probably in the clear.

[jpearsall187]

What is considered a fair market wage? I have read elsewhere that 50% of net earnings would be a reasonable salary.

[llworking]

What is considered a fair market wage? I have read elsewhere that 50% of net earnings would be a reasonable salary.

The IRS probably wouldn't buy 50% unless it really was a true fair market wage. I will give you an example:

Your business is a retail store that sells lots of different products. A typical manager's salary is 60k, but the store nets 100k. That might fly because you can defend the salary based on a typical retail manager's salary.

However, when you are in any medical field, be it human or animal, the typical wage for a professional is the net earnings that you make from your practice. Therefore trying to claim a salary of only 50% of the net earnings could be seriously pushing the envelope.

The first year you are in business the IRS is going to be pretty forgiving about bad choices on wages because the business has no history and therefore its difficult to determine what a wage should be. However, by the second year, and absolutely by the third year, your wages need to be at least 70-80% of your net earnings (after expenses).

[BusinessLawGR]

No.

It's a cockamamie idea that isn't going to fly with the IRS or state taxing authority.

I suggest you talk to a business attorney and a CPA before you do something that might land you in jail for tax evasion.

Always rely on a good CPA's recommendation for these kinds of things. The rules are complicated and there are generalities that can keep you in the clear but also cost more. Your CPA should be able to strike the right balance based on various factors.

But from a legal standpoint, you don't get to choose if someone is a independent contractor or if they are an employee. That determination is based on a litany of factors including training provided, tools provided, benefits provided, how compensation is determined, and control over the individual. It would seem very difficult for you to prove that your LLC (that is only comprised of you) did not provide training, tools and substantial control over the actions of the independent contractor (being you individually). Even more, unless there is some kind of commission based compensation agreement in place, its even more out there to believe that a independent contractor will be compensated based on the overall performance of the LLC.

Not a very solid plan and, as others have said, if either you or your LLC is audited, you might be in for a rough ride.

[llworking]

Always rely on a good CPA's recommendation for these kinds of things. The rules are complicated and there are generalities that can keep you in the clear but also cost more. Your CPA should be able to strike the right balance based on various factors.

But from a legal standpoint, you don't get to choose if someone is a independent contractor or if they are an employee. That determination is based on a litany of factors including training provided, tools provided, benefits provided, how compensation is determined, and control over the individual. It would seem very difficult for you to prove that your LLC (that is only comprised of you) did not provide training, tools and substantial control over the actions of the independent contractor (being you individually). Even more, unless there is some kind of commission based compensation agreement in place, its even more out there to believe that a independent contractor will be compensated based on the overall performance of the LLC.

Not a very solid plan and, as others have said, if either you or your LLC is audited, you might be in for a rough ride.

The rules regarding S-corps, (and the OP has elected to be taxed as an S-corp) are very clear. There is little room for "balance" as you describe it, except in what a particular industry could demonstrate as a fair market wage.