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Can you incorporate your job?

October 14, 2009

With individual tax rates set to rise and talk of a corporate rate cut, more folks will try tax planning like Mr. Clark suggested to Mr. Martin, an agent for a Knoxville, Tennessee RE/MAX office:

Mr. Clark advised Mr. Martin to conduct his business through a corporation. Mr. Clark thought that "A C corporation, if he [Mr. Martin] is accumulating equity, pays taxes at 15 cents on the dollar. It doesn't have [a] self-employment tax obligation. A sole proprietorship has both income tax obligation and self-employment tax obligations." Mr. Martin did not consult an attorney or anyone other than Mr. Clark regarding the advisability or consequences of conducting his business through a C corporation. Mr. Clark "set up the corporation" and its accounts for Mr. Martin.

The corporation conducts no business apart from Mr. Martin's real estate activity with RE/MAX. Mr. Martin deposits his commission checks into the corporation's bank account. The corporation pays a large portion of Mr. Martin's business expenses and many of the Martins' personal expenses.

The IRS didn't much care for this setup and treated the payment of the corporation of Mr. Martin's expenses as wages - taxing them at his personal rates and subjecting them to the 15.3% combined employer-employee FICA and Medicare tax.

Based on the Tax Court's opinions about Mr. Clark, Mr. Martin had an uphill battle:

Unfortunately, Mr. Martin's confidence in Mr. Clark appears to have been misplaced. Mr. Clark testified that he is not an attorney, an accountant, or an enrolled agent. His 6-year employment with the IRS, primarily matching Forms W-2 and 1099 with the individuals' returns, does not necessarily qualify him to prepare tax returns let alone advise clients regarding business planning, business accounting, or various complicated problems involving Federal taxation.

...

Mr. Clark prepared the unusually obscure petitions filed in these cases. During the trial Mr. Martin relied almost entirely on Mr. Clark's testimony to explain petitioners' positions in their cases. That testimony for the most part is void of relevant content.

Except for that, things went fine. Oh, and except for the decision:

Mr. Martin is an employee of the corporation and the payments made to him are wages, the corporation may not deduct the employment taxes until the contest has been resolved, and petitioners have failed to identify or substantiate any deductions not allowed by respondent.

The Moral? It's hard to successfully incorporate your job, and it's even harder to get at your money if you do.

Cite: Martin, T.C. Memo 2009-234.