YOUR DEPENDENT CONTRACTOR BUSINESS: CHOICE OF ENTITY
Many high tech industry consultants and professionals work for a single company on a particular project over an extended period of time. Although this is considered a normal working relationship within the industry, the federal and state taxing authorities as well as state agencies in charge of employment issues (collectively "government") are suspicious of these arrangements and often consider them merely a ruse for the traditional employer-employee relationship. Thus, there has been an on-going effort by government to recast an independent contractor relationship into the more familiar employer-employee context.
Simply put: government is not comfortable with this relatively new business arrangement and can be hostile to it, because it views the arrangement as a potential tax dodge - a way to circumvent the taxes and insurance payments companies pay when the traditional employer-employee is involved. If successful, recasting the independent contractor relationship will cost both the company and the worker higher taxes.
For the company, the government could require extra employment taxes, penalties and interest, as well as additional insurance premiums. The contractor may lose some or all business deductions - automobile, home-office deduction, deduction for business portion of utilities, advertising and marketing, entertainment and travel. Also, the contractor will be limited in the choice of retirement, benefit and health plans.
To read the entire memo, click here: Your Independent Contractor Business - Choice of Entity.