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    5 Replies Latest reply on Jan 7, 2012 9:36 PM by Bridge

    Covert from W2 to S-corp

    scrop2011 Newbie

      I am currently a W2 employee and I am seeking some guidance on how can I convert to a S-Corp and work at the same client. Please read below for more details kindly answer my questions.

       

      I am working as a w2 contractor through a vendor company (Company 2) for client (Client1) in California and the client has mandated that all the vendor companies have to do business with them through a primary vendor (Company 1) to handle their vendor management. So the structure is Client1 > Company1 > Company2 > ME (I am a W2 contractor with Company2) and I have been working at this client for more than an year.

       

      I recently setup an S-Corp incorporation and I would like to do business directly with the client (Client1) through the prime vendor (Company1). However the client and prime vendor expressed a concern that there could be an issue with the IRS and whether I would qualify as a corp-to-corp based on being a W2 worker previously and doing the same job.  They feel that based on this I would most likely not qualify and IRS would see this as a mis-classified worker and the Client and Vendor company (Company1) would be liable to pay the fines associated. Below is the IRS website link for information on IRS guidelines for Independent Consultants:

      http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

       

      Below are some of the questions that come to my mind:

       

      1. Is this a valid concern as I am not a W2 contractor for either the client (Client1) or prime vendor (Company 1) and if so how can I work around this problem.

      2. Can I work as an s-corp through another vendor company to do the same job - such as - Client1 > Company1 > Company 3 (another vendor company) > ME-INC (Me as a owner of a S-Corp)

      3. Or can I transfer company ownership to my wife and work as a W2 employee of the S-corp owned by her such as Client1 > Company1 > WIFE-INC (Transfer the S-corp ownership to my wife) > ME-(I working as an W2 contractor of the S-Corp now owned by my wife)

       

      This is very important and I would really appreciated if someone can answer my question and guide me through.

       

      Thanks,

      Scorp2011

        • Re: Covert from W2 to S-corp
          Erik Salmon Scout

          HI,

           

          You also have an issue with Calif. If the company you are contracted with controls your time and or is the majority of your income then you will be considered as an employee by the state.

           

          First I would consult with a lawyer but as long as you have a contract from their corporation to do business with your corporation your corp is now responsible for all income and payroll tax. There is not misclassification since there is a contract between two companies, not an individual, and your company is paying payroll tax and now you need to talk with a tax lawyer or CPA.

           

          Basically you will be invoicing the other company for work done by your company. How you handle payroll is up to you, I would hire a payroll service if you are going to take a paycheck otherwise you can take a draw but again consult with a CPA or Tax Lawyer. With the S corp you are filing personal and corp taxes on the same tax return so again I would consult with a CPA or Tax Lawyer.

           

          Good Luck,

           

          Erik Salmon, CCFC

          • Re: Covert from W2 to S-corp
            Bridge Navigator

            It seems you and Client 1 have mixed up the discussions between 1099 (independent contractor) versus W-2 employees and corporate structure (sole proprietor, partnership, LLC, corporsation, etc.).

             

            It appears that Client 1 is trying to avoid having employees so that they do not have to pay payroll taxes and to keep worker's compenstaion expenses low. I am assuming that you work exclusivley (or almost) for Client 1 and they control your time and manage what you do.

             

            I am not familiar with specific CA law that may also apply.

             

            Assuming that the Company 1 - Company 2 relationship worked for everybody, it appears all you are looking to do is replace Company 2 with your new Company 3.  Why they would think that this would be an issue based on being a W2 worker previously and doing the same job is beyond me - ask them.  You were a W2 at one company and now will be a W2 at another.  In both cases, Company 1 was paying another company who eventually paid their employee - you.

             

            I am always amazed and how many hoops companies will try to jump through to avoid paying their fair share of taxes.

             

            Is there anyway that you could just work directly (W2 as you say) for Company 1 who then bills Client 1?  Seems simpler.

             

            Be aware that in setting up your own company you will incur annual filing fees with they state and extra time or money in preparing the "company's" taxes.

             

            Best of luck,

            Greg