by Fred Abramson on March 3, 2010 · 1 comment
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The IRS allows owners of LLC’s to make the decision themselves about how they want the company to be taxed. The LLC can be taxed as in two general ways:
- As a pass-though entity, like a s-corporation, sole proprietorship
- Like a c-corporation
What is a pass though entity?
Usually business owners planning on forming a LLC at the startup stage decide that the LLC should be a pass through entity. What this means is that the corporation itself does not pay any taxes. All tax profits and losses are reported by each business member on their tax return. Like a sole proprietor, each owner files a schedule c.
If your LCC has more than 1 member be aware that each member must file the IRS Form 1065 and must be the same one used by the LLC.
How to Change your tax treatment
What makes LLC’s unique is the ability of its members to change the way it is taxed. You can elect to be taxed as a S or a C corporation. To make this change, you only have to check the box that you wished to be taxed in form 8832 and simply file it with the IRS. You can make this election at any time. You will now be required to file corporate tax returns.
If you are interested in the entity being taxed as an S, simply file IRS Form 2553. Be aware that to file as an S corporation, you have to meet its conditions. Unfortunately, if you wish to change the way your LLC corporate taxed back to a partnership, you will have to wait five years to do so.
If you have any questions regarding starting a business in New York and tax issues related to it, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.
Misclassifying an an employee as an independent contractor is one of the most expensive mistakes that a business owner can make. It does not matter whether you intentionally made the mistake. You can be subject to large penalties, fines and even subject the criminal liability. I have recently reported that the IRS has been targeting employers with independent contract workers.
The problems don’t end with the employer. Misclassified workers can lose:
- Worker’s Compensation Insurance
- Unemployment benefits
- Wage protection such as minimum wage and overtime.
Employers who hire independent contractors have an unfair advantage because labor costs less and they could charge less for their goods and services. If you are in the construction industry, a competitor who improperly misclassifies their workers as independent contractors can underbid you.
The employer who gets caught with improperly classifying workers as independent contractors can be subject to liabilities for:
- Unpaid Federal, State and Local Income Tax withholdings
- Social Security and Medicare contributions
- Workers’ Compensation Premiums
- Overtime
- Unemployment compensation
- State-mandated benefit programs
Audits
The New York Department of Labor conducts two types of audits, general and specific. The general audits are conducted randomly with nothing specific as its subject. It is interesting to note that these audits are not statistically random as specific industries, such as construction are heavily targeted. Specific groups are the subject to targeted audits as well, which are based on a variety of factors, including prior issue with improper classification. The Cornell Law Institute performed an excellent report about the misclassification of independent contractors in New York and is a great resource.
Prevailing Wage Duties
On publicly funded construction projects, some companies use missclassification as a way to avoid paying prevailing wage rates. A company that is caught can be subject to paying restitution to affected employees, fines for failing to maintain payroll and general records and submit valid and certified records.
Conclusion
Due to the increased scrutiny on the use of independent contractors, employers, especially those in the construction industry need to focus on how they classify their workers. You should conduct audits internally with legal counsel to determine if their are any issues.
If you have any questions regarding the classification of independent contractors, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.
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