Employee or Independent Contractor?

How Employers and Contractors Are Retaining Independence Under AB5 

From Small Business Trends, discusses setting up a corporation, LLC or partnership which can be part of a strategy to show independence in California after AB5. Nellie writes:

Retaining Independence Under AB5

Contractors now need to show true independence in how they conduct business. So maintain a separate business location and legally structure the business as a separate entity. This further establishes proof. The relationship doesn’t fit one of employer and employee. Recent U.S. Census data reveals the total number of business formation applications nationally reached the highest yet. Nearly 900,000 got filed in the last quarter of 2019. And California contributed the majority of the increase.

Set up a corporation, LLC or partnership. This also allows the contractor the freedom to stay in compliance with AB5. And you determine how taxes will be paid. For example, as a corporation, the independent contractor is considered an employee of the corporation. This not only gives the contractor liability protection, but also establishes the corporation to be taxed at 21% under the Tax Cuts and Jobs Act. It does mean, however, the contractor will also be taxed again when the person takes a salary.

Setting Up Your Contracting Company

An LLC offers a formal business structure with the benefits of a corporation. But you get none of the costs and compliance complexity of a corporation. It exists as a separate legal entity from the owners or members. This means it protects the members from personal liability. The LLC’s financial and legal responsibilities belong to the entity. This makes it a popular choice for a business structure. The paperwork and ongoing filing requirements remain minimal.

A partnership resembles a sole proprietorship. Each partner owns a portion of the assets and liabilities of the business.

Fortunately, each of these structures (corporations, LLCs and partnerships) can elect S Corp status. This allows the business to take control of the amount of Social Security and Medicare taxes that are paid. As an S Corp, the owners must be paid a reasonable salary. Then they distribute the remaining profits not subject to payroll taxes.

To elect S Corp status, owners, members and partners must all agree. Form 2553 must be filed with the IRS by March 15. Some businesses may miss the deadline. If so, they remain as is. And the S Corp election becomes effective for the following tax year.

Read the full story at How Employers and Contractors Are Retaining Independence Under AB5 – Small Business Trends

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