Employee Leasing, LLC or S Corp

[mcewencpa]

Employee Leasing has become quite popular these days as a way for asmaller employer to take advantage of better medical insurance group plans offerred by employee leasing companies. But what impact does this have on the owners of LLCs and S-Corps.

1) An LLC member is not an employee. Can he lease himself through a third party Leasing Company back to the LLC where he is a member?

2) If he does this, then is he no longer considered an active member of of the LLC since there are no guaranteed payments for services and therefore his distributions would be passive?

3) Can he participate in a 125 plan of the 3rd party leasing company. He couldn't as an LLC member?

4) What implications are there for an S-Corp stockholder leasing himself to his corporation?

[outwest]

First, no one's status as employee, member or shareholder changes by using the cover a employee leasing company. Even thought the leasing company is the employer of record, the rules apply to that indivdual as if they worked directly for the business.

So, your LLC member still can't be and employee of his LLC which means he takes guaranteed payments, can't participate in a 125 plan, and his active passive status remains the same.

The S corp sharholder of course can be an employee, however, the S corp limitations still apply. One other tip, break out the officer wages paid through the leasing company to line 1 on the 1120s, everyone else as other deductions - leased employees.

Observation, if a leasing company says different that about, ask for the citation.

Doug

[Unregistered]

Just Posing a Question

What about having the leasing company set-up as a C Corp. I would assume then that the owners could qualify for benefits.

Any thoughts?

[outwest]

I presume you mean the LLC members setup a C corp to lease employees. As officers of the C Corp they would be employees. The LLC is the only leasing client.

No direct citations on this but I think the IRS would look at the substance and throw it out. Typical situation is that the leasing Co is indeed a C Corp, but usually no overlap in the individuals providing service to the entities.

Doug

[mcewencpa]

Some observations on the replies

Most respondents seem to agree that you can't automatically qualify yourself for benefits you would not otherwise qualify for by simply becoming a leased employee (IRS 414).

In the case of an LLC, since a member cannot be an employee would you just report the amount paid to the 3rd party leasing company as a guaranteed payment on the 1065?

In the case of an S-Corp, I have heard others suggest you report the leased employee portion paid for the officers as officers salary so you don't have an S-Corp without officers salaries. The issue to me is that you would then not match to the W-3 for the year since their would not be one for the S-Corp. The W-3 is filed by the PEO under its tax id.

The reason these situations come up is not to bypass the rules are achieve some tax advantage. It is just to allow employees of a very small business to participate in the health insurance plan of a large PEO, even if the company is not paying for it, it is coming out of theemployees paycheck.

[outwest]

On the Shareholder salary issue.

I believe the IRS is very interested in zero officer salary 1120S. On the other hand, with some reasonable figure is in line 1, I doubt the income tax auditor will match to the payroll reports.

Either way, I think you have potential questions. I think it's easier to explain where the payroll reports are to match the officer salary than to explain to a auditor looking for abusive S corp avoidance of shareholder payroll where that payroll really is and then *still* have to explain where the payroll reports are.

Doug