hiring employees as w2 independent contractor to avoid taxes/insurance.

Sierrasparky

Senior Member
Also being in SoCal, when I have jobs where I need manpower and they don't need to interface with the customer, I use temps. Decton staffing has provided me some good guys for various jobs, at reasonable rates (guys who are WC and GL insured for far cheaper than you can bring someone on for).

If you're using guys under the table because you can't afford to find a legal way to do it, you need to re-evaluate your business model, especially in SoCal.
Yea sounds great. but do they have their Gen journeyman's cards
 

electrofelon

Senior Member
taxes are eating profits alive in California. Being competitive in los angeles is difficult. Does anybody know of a juggernaut to slide under the irs radar in a creative but legal way when it comes to hiring employee? Avoiding payroll taxes and workers comp insurance? Any advice or ideas would be appreciated .....

Hans konrad , redondo beach , ca......
Generally the perfectly legal way to accomplish this is to form a corporation (LLC, S-corp) and have your "employees" be members/officers of the corporation. Many construction companies in my neck of the woods are set up this way and that is absolutely what I would do if I wasnt content being a one man shop.
 

kwired

Electron manager
Generally the perfectly legal way to accomplish this is to form a corporation (LLC, S-corp) and have your "employees" be members/officers of the corporation. Many construction companies in my neck of the woods are set up this way and that is absolutely what I would do if I wasnt content being a one man shop.
If they are officers they will want a bigger slice of the pie, and not too many want to offer that big of a slice to someone fairly new to the organization either. An employee that has been there a while and performs well - maybe not as bad of an idea. If they know what goes on in the management side of things they will see things differently, and will realize why they were not paid as well as they maybe thought they should be, and maybe that the boss didn't make as much as they thought he did.

Problem is that unless they have invested enough to have significant amount of ownership, they still may not get the whole picture, it is easier to spend or manage someone else's money foolishly then it is your own, well maybe not easier, but if you drag someone else down with you there is more litigation and messy dissolution of the partnership then if you drag yourself down.
 

curt swartz

Electrical Contractor - San Jose, CA
Generally the perfectly legal way to accomplish this is to form a corporation (LLC, S-corp) and have your "employees" be members/officers of the corporation. Many construction companies in my neck of the woods are set up this way and that is absolutely what I would do if I wasn't content being a one man shop.
I can't imagine any employee with half a brain being willing to accept becoming a non controlling shareholder of a corporation for the same hourly rate and at the same time accepting full liability for anything that goes wrong. I don't see how that would save money either. Taxes have to be paid by someone no matter what.
 

electrofelon

Senior Member
If they are officers they will want a bigger slice of the pie, and not too many want to offer that big of a slice to someone fairly new to the organization either. An employee that has been there a while and performs well - maybe not as bad of an idea. If they know what goes on in the management side of things they will see things differently, and will realize why they were not paid as well as they maybe thought they should be, and maybe that the boss didn't make as much as they thought he did.

Problem is that unless they have invested enough to have significant amount of ownership, they still may not get the whole picture, it is easier to spend or manage someone else's money foolishly then it is your own, well maybe not easier, but if you drag someone else down with you there is more litigation and messy dissolution of the partnership then if you drag yourself down.
LLC's are very flexible in that you can freely establish things such as control, profits, and salary. I have an LLC and I could bring Sam Sinkstopper into the LLC even as a temp for a job, and then send him on down the road when it was done.

Also I should clarify that I dont, nor would I condone, using this structure to "Screw someone over". I see it as a win win for everybody. Everybody has less hassle and gets more take home. Members can still pay into workers comp/disability if they wish.
 

electrofelon

Senior Member
I can't imagine any employee with half a brain being willing to accept becoming a non controlling shareholder of a corporation for the same hourly rate and at the same time accepting full liability for anything that goes wrong. I don't see how that would save money either. Taxes have to be paid by someone no matter what.
They would get more salary for sure. Some of the payroll savings from FICA, comp, disability, etc would go to them. I dont really think there is any liability issue. The entity would still have an insurance policy, and the members are very will isolated from liability by the corporate structure. It saves money in several ways. First is the savings I just mentioned FICA, comp, disability. Another is that the employee/member will pay less income taxes - probably none - if he has a good accountant.
 

ptonsparky

Senior Member
Generally the perfectly legal way to accomplish this is to form a corporation (LLC, S-corp) and have your "employees" be members/officers of the corporation. Many construction companies in my neck of the woods are set up this way and that is absolutely what I would do if I wasnt content being a one man shop.
As an S-Corp, it saves no money as far as WC. I am an employee (we can't all be officers) and as such am required to be covered. If I have to buy it anyway everyone else just as well be covered.
 

electrofelon

Senior Member
As an S-Corp, it saves no money as far as WC. I am an employee (we can't all be officers) and as such am required to be covered. If I have to buy it anyway everyone else just as well be covered.
I dont know much about S corps, besides details vary from state to state.
 

kwired

Electron manager
I dont know much about S corps, besides details vary from state to state.
I don't either, but when it comes to corporations or LLC's in general often the major shareholder(s) are employees if they draw a regular salary, therefore the corporation is paying half their social security, workers compensation, unemployment taxes, etc.

In earlier post are you saying you make "temps" officers of the corporation or LLC? I don't think I would even consider such a thing unless someone has been an employee at least three to five years and shows they would do what is right for the company, has at least reached journeyman level and maybe is even willing to gain their contractor's license.
 

gadfly56

Senior Member
They would get more salary for sure. Some of the payroll savings from FICA, comp, disability, etc would go to them. I dont really think there is any liability issue. The entity would still have an insurance policy, and the members are very will isolated from liability by the corporate structure. It saves money in several ways. First is the savings I just mentioned FICA, comp, disability. Another is that the employee/member will pay less income taxes - probably none - if he has a good accountant.
Sam Sinkstopper is going to have to pony up the full 15.3% of the FICA, so unless he's getting compensated accordingly, he's an idiot to accept your proposition. That will also drive up his tax rate marginally since he is getting x more dollars to cover FICA, which he'll also want to be compensated for. This is kind of a reverse intelligence test; if someone will work for you this way, they're too dumb to hire.
 

curt swartz

Electrical Contractor - San Jose, CA
Another is that the employee/member will pay less income taxes - probably none - if he has a good accountant.
I always love when people tell me that have such good accountants they pay almost no taxes. These same are crying a few years latter when the IRS does an audit and charges back taxes, interest and penlites for making illegal deductions. Income is income, there is no magical way of honestly avoiding taxes. You may get away with not paying your taxes or you may not. I sleep at night knowing I run an honest business.

As far as a corporation shielding officers from liability it is not as good as may people make it out to be. I have been in business for over 30 years. I know many contractors that are incorporated that have been in lawsuits. The person/company filing the lawsuit doesn't just file against the corporation, they also file against the officers. They may not collect anything from the officers if they were not directly involved but they still have to defend themselves. Most construction lawsuits don't go to trial. The insurance companies get together and offer a settlement. If the officers are named as part of lawsuit the insurance companies my expect them to kick in some as part of the settlement. If an officer of a corporation is directly involved or had directly knowledge of wrong doing of the corporation they can be held liable.
 

Electric-Light

Senior Member
From what I understand, you can not shield yourself from liability from uncle sam especially when they can prove you did it to skirt them, which i think they call it money laundering.
 

CT Tom

Member
I can not speak to California in regards to electrical, as here in CT, if I want people to work on my jobs, I either hire journeyman (E2) who are licensed and registered through the state, or hire subcontractors who own their own business attached to their masters (E1) license, so having workers, they are W2 period.

That said, there was an auto shop that decided to pay his people as 1099'd subs as opposed to W2 workers. I won't go into detail as fulthrotl did a good job earlier on in the thread, but the auto repair shop is long gone, put down by the fees and fines from the IRS both federal and state.

Good luck with whatever you chose, just be like Indiana jones, and choose wisely!
 

electrofelon

Senior Member
I don't either, but when it comes to corporations or LLC's in general often the major shareholder(s) are employees if they draw a regular salary.....
That is not my experience. I dont see any logic or reason for a major shareholder to be an employee. It defeats much of the point of having the entity in the first place.

In earlier post are you saying you make "temps" officers of the corporation or LLC?
I have never done that yet, but was saying I could.

I don't think I would even consider such a thing unless someone has been an employee at least three to five years and shows they would do what is right for the company, has at least reached journeyman level and maybe is even willing to gain their contractor's license.
But why not? With the flexibility of an LLC you can give them zero decision, authority, or profit so what is the problem? Its not like they will show up the next day in a new BMW purchased on the company credit card and start a hostile take over....

Sam Sinkstopper is going to have to pony up the full 15.3% of the FICA, so unless he's getting compensated accordingly, he's an idiot to accept your proposition.
In theory, but an accountant who knows what he his doing can make most of the self employment tax go away. They can do this because the IRS only wants to see about $5000 in "salary" (using quotes here because I am not an accountant and not sure I am using the correct words) and the rest of the persons "pay" can be "reimbursement" for renting ones tools and equipment to the LLC. Thus the person is subject to unemployment tax (the half of the 15.3%) on only $5K. That is one strategy, I am sure there are others.

I always love when people tell me that have such good accountants they pay almost no taxes. These same are crying a few years latter when the IRS does an audit and charges back taxes, interest and penlites for making illegal deductions. Income is income, there is no magical way of honestly avoiding taxes. You may get away with not paying your taxes or you may not. I sleep at night knowing I run an honest business.
I also run an honest business too. The head of my accounting firm is a lawyer and a CPA and runs a very well respected tax and real estate firm. They have been in busy for decades and I doubt they are doing anything illegal. Curt, there are many aspects to business and overall I dont think I am particularly good at it, but one thing I do have down is keeping my expenses and taxes low. Taxes are NOT taxes, so to say. That may be the way it should be, but not the way it is. This is America, the land of the free and the corporation; the tax laws are very favorable to corporations. Here are a few quotes from judge Learned Hand, I think I dont need to say more:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
In America, there are two tax systems: one for the informed and one for the uninformed. Both are legal



That said, there was an auto shop that decided to pay his people as 1099'd subs as opposed to W2 workers. I won't go into detail as fulthrotl did a good job earlier on in the thread, but the auto repair shop is long gone, put down by the fees and fines from the IRS both federal and state.
That is something completely different, 1099ing people. My understanding is the IRS has really been cracking down on the 1099ing of people are are not really sub contractors.
 

gadfly56

Senior Member
...

In theory, but an accountant who knows what he his doing can make most of the self employment tax go away. They can do this because the IRS only wants to see about $5000 in "salary" (using quotes here because I am not an accountant and not sure I am using the correct words) and the rest of the persons "pay" can be "reimbursement" for renting ones tools and equipment to the LLC. Thus the person is subject to unemployment tax (the half of the 15.3%) on only $5K. That is one strategy, I am sure there are others.
...
Yes, a portion of their reimbursement is "unearned" income. However, your reimbursement rates had better be comparable to what's local. You are not likely to get away with "renting" his truck for $500/day. And even at that, the pitfalls on "passive" vs "active" income on rental monies can nail you right to the wall. And he's not paying half the 15.3%, he's paying all of it.
 

electrofelon

Senior Member
Also I will say that there are many different situations and people have different wants and needs. I am not trying to make a blanket statement that "this is the best way for everybody". Look at it this way: In general, as a regular employee, one will get paid less, may pay more taxes depending on how they structure themselves and how informed they are, will show more income, will get the security of comp/disability, and will pay into social security/medicare for later (hopefully). Some people like those features and thats fine. IF you were in a situation where you were offered to be a member of an LLC and get paid directly with no deductions, you would take home quite a bit more, you will likely pay less taxes, you would show very little income, you would not have or would be responsible for your own comp/disability, and you wouldnt be paying much into SS/MC. Personally Im not much into govt slush and programs and prefer to take responsibility for my own future finances. I also want to pay off my mortgage as soon as possible and get out of debt - Im not big on the 30 year plan. I Want as much money now to do this and am willing to take a little more risk to get ahead. Thats just me, and I am glad that I am informed enough to know that I have that option. If I were to need help on a job or even need a full time guy, I would bring a guy into the LLC - its perfectly legal and is just so much easier for me.
 

kwired

Electron manager
I always love when people tell me that have such good accountants they pay almost no taxes. These same are crying a few years latter when the IRS does an audit and charges back taxes, interest and penlites for making illegal deductions. Income is income, there is no magical way of honestly avoiding taxes. You may get away with not paying your taxes or you may not. I sleep at night knowing I run an honest business.
You can reduce income tax by increasing expenses - but this is not something you can do each and every year unless you have a huge amount of equity to draw from - eventually you need to start building equity again or even start earning enough to pay back loans you used to purchase that equipment that did reduce your taxable income in past tax periods.
 
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