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In a recent post I mentioned that a new law in Virginia (§ 40.1-28.7:7) assumes that an individual who is paid for services by a person is presumed to be an employee of that person. There is more to the sentence (highlighted in bold):
“…an individual who performs services for a person for remuneration shall be presumed to be an employee of the person that paid such remuneration, unless it is shown that the individual is an independent contractor as determined under the Internal Revenue Service guidelines…. As used in this section, “Internal Revenue Service guidelines” means the most recent version of the guidelines published by the Internal Revenue Service for evaluating independent contractor status….”
The important thing to note here is that Virginia law defers to IRS guidelines, which are complicated so I won’t go into that yet. But here’s an additional observation: I told you in my previous post on this topic that if you want to hire an independent contractor you should hire only COMPANIES, not individuals, so this Virginia law won’t apply to you. But what if even a company can be ignored by the law and the owner is treated as the relevant individual for purpose of this VA law, so that hiring the company is equal to hiring the individual owner, and despite your diligence you find yourself right back in the space of this Virginia law?
“That’s not possible,” you say. Oh but it is possible. You see, by default the IRS ignores single member LLCs when it comes to paying taxes. The IRS treats the company as if it were the individual who owns it. What if a Virginia court were to take that position? Virginia law on independent contractors already defers to the IRS on one critical issue. A VA court might rule that setting up a single member LLC is merely an accounting convenience or worse, a sham, and decide that if single member LLCs are ignored by the IRS then they should be ignored by Virginia law in this instance. Not saying this WILL happen, but I can imagine a scenario….
So now what do you do?
Well, I suggest that the independent contractor file an election with the IRS to be taxed as either an S-Corp (generally preferred for small businesses) or as a C-Corp. Then in the eyes of the IRS the LLC is a corporation, not an idividual. And presumably (hopefully?) Virginia courts would conclude the same.
I know there are skeptics among you. You know your independent contractor really well, and s/he definitely wants to be treated as an independent contractor not an employee, so you’ll just have a contract between you. Right? Don’t rest yet, there’s more to this law and its companion statutes. Stay tuned for additional parts in this series.
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Continue reading in part three of the series.