Dispute over w-2 versus corp-to-corp

This is an point of concern for a lot of companies. The point is your client is trying to avoid the possibility that you will come back later and claim that you are/were an employee of theirs rather than an independent contractor. The IRS isn't likely to try to reclassify a worker willy-nill. They usually have a request from a worker that s/he was really an employee. That is why your client wants to clearly classify you as an employee now. You should take a look at the IRS's Publication 1779: Independent Contractor or Employee? on what determines an employee first.

If after you take a look at the definitions of what is an employee vs. an independent contractor you think you will really be an independent contractor, then push for the corp-to-corp arrangement. Be sure that the contract clearly indicated you are an independent contractor and the contract is between the client and your corporation. Otherwise, you really are an employee and consider the offer on the table.

The corporate veil does protect the client if you are an independent contractor. Here is a quote from the IRS's Training Materials: Independent Contractor or Employee?:

Questions sometimes arise concerning whether a worker who creates a corporation through which to perform services can be an employee of a business that engages the corporation. Provided that the corporate formalities are properly followed and at least one non-tax business purpose exists, the corporate form is generally recognized for both state law and federal law, including federal tax, purposes. Disregarding the corporate entity is generally an extraordinary remedy, applied by most courts only in cases of clear abuse. Thus, the worker will usually not be treated as an employee of the business, but as an employee of the corporation.

Section 1706 says that you can't just say, "Oh, it's common practice to hire these workers as independent contractors" and avoid the tax, interest & penalties if a worker is reclassified from an independent contractor to an employee. Unfortunately, Section 1706 only applies to computer-related industries. Which seems unfair, but I think it ismostly because as an industry, it made a common practice of abusing the employee/IC distinction in the 1980s. Some groups are working to repeal Section 1706 so all workers are treated the same, but apparently Congress is busy with other issues.

I hope this helps a little.

L:)

Linda,

I just found Section 1706. And I believe this is where the problem starts...

My issue is that without the income flowing through the S-Corp now I can't take advantage of expenses incurred nor tax deferred investments!

Thanks again.