Self-directed IRA’S are commonly used vehicles for investing IRA funds into assets without having to immediately pay taxes on the funds used for investments. These IRA-owned LLC‘s operate out of a business checking account with the “Manager” of the LLC (also the IRA account holder) being the authorized signer on the account. If the account holder is not extremely careful, the self-directed IRA may create major tax and legal problems. Specifically, tax-exempt status may no longer be afforded to the IRA and the entire value of the IRA may be treated as taxable to the account holder, including possible interest and penalties.

Ensuring that the account holder does not engage in, what the IRS considers, “prohibited transactions” is key to avoiding these potential issues. Generally, the self directed IRA shall not interact, or transact matters, with “disqualified persons.” Disqualified persons include, but are not limited to, the IRA account holder; the account holder’s spouse; lineal descendants, lineal ascendants, and spouses of these persons; and, business entities owned 50% or more by these people. It is important to note that any direct or indirect interaction, and even minor transactions, between the IRA and a disqualified person may result in the complete taxation of the IRA.

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Avoiding payroll taxes by intentionally or unintentionally misclassifying employees as independent contractors is a costly mistake.

Most often the misclassification will be discovered during an audit or if a former worker files a complaint. Under “the twenty factor test” in Revenue Ruling 87-41, an employee is anyone who performs services for an employer if the employer can control what will be done and how it will be done. However, in an independent contractor relationship the employer has the right to control or direct only the result of the work done, and not the means and methods of accomplishing the result.

How to properly create an independent contractor relationship?

Foremost, you must have an independent contractor agreement in place. This will help define the responsibilities of the indepependent contractor to follow proper standards under the law. Next, the independent contractor should set up his own corporation or LLC. Then the independent contractor relationship is between two entities. This helps the employer prove he is not controlling methods to accomplish the result. To help understand how to create an independent contractor relationship, speak to one of our specialists at (800) 603 – 3900 or visit our website today!