►Business concern & Startups FAQs | Knowledge Base

One of the tiptop questions we go far the area of corporate governance is whether an officer of a corporation is an employee.

Such a common question should have a very easy answer, right?

So why is it so difficult to become a straight answer on this? The reason has to do with the fact that this question is actually a crossover issue blending areas of corporate governance, employee law, tax police, and payroll rules. It sounds similar a very uncomplicated issue, but information technology can have a very complicated reply.  The answer to this question is important for not only corporate governance reasons, but it can have important ramifications on revenue enhancement liabilities, payroll matters, and employment law.

The answer to this question is "More often than not yes, but it depends," but to help y'all understand why, and when an officer of the corporation would NOT exist an employee, it is important to talk over the legal issues at play.

 Rules are Different for Corporations than LLCs

For a corporation, including a C Corp. and an Due south Corp., generally, officers are considered employees of the corporation, if they're beingness paid to provide services rendered.   An officer of a corporation is the person who handles the day-to-day affairs of the system. Then for example, the president who oversees the staff and activities of the business, the secretarial assistant who keeps rail of the corporation'south records, and the treasurer or CFO who manages the corporation's finances, are officeholder positions, and these tin be fulfilled through employee positions.

 Unmarried-Owner Corporations: When All Officeholder Positions are Fulfilled by the Business's Sole Shareholder

For many small businesses, however, in that location are no exterior employees fulfilling these duties. Especially for single possessor businesses, where there is one shareholder who plays all 3 roles (CEO, CFO, Secretary).  In these cases, what practically happens is that the small business owner fulfills these duties, for no extra or additional pay. The fact that the concern possessor is not being paid a separate bacon for acting as an officer of the corporation has nothing to do with the business owner's status as an individual who is providing services for the corporation. Any person who provides services for a corporation should exist compensated as an employee (or, as explained below, an independent contractor).

This is where the issues cross over from corporate governance into tax law. The IRS generally wants to see business organization owners who provide services to their corporations being compensated as employees, i.eastward., through W-two wages which are subject to payroll taxes. So, what should exist happening is that the corporation compensates its business possessor for all services, including the services of acting as an officeholder for the corporation.  The reality, nevertheless, is that many business owners do not properly pay themselves correctly, and instead take draws (i.due east., take a portion of the business organization'due south profits, not discipline to payroll taxes to compensate themselves equally business owners.) This is not the right way of doing it, and it can trigger an audit on the tax side. For more information, delight bank check out our article on how concern owners should be compensating themselves properly, and what steps they can accept to minimize their tax obligations.

 LLCs: Is the Officer a Fellow member or Outside Rent?

In the LLC context, the question of whether an officeholder is an employee or not depends on whether the person is a member of the LLC or not. (Past the way, this section just applies to LLCs that are taxed as partnerships or sole proprietors, non LLCs that accept taken the election to be taxed as a corporation or Southward corporation).

f the person performing the officer duties is a member, so they will not be an employee and not be considered an employee, considering there is a specific IRS regulation that prohibits LLC members from taking wages as employees. On the other hand, if the officer duties are being performed by someone who is non a member of the LLC, such as an exterior hire, then they tin exist characterized as employees.

 Why Does it Thing?

The power to characterize a person providing services to a company as "an employee" is important because it can have important tax consequences. Employee compensation is fabricated pursuant to payroll taxes, and employee wages are considered deductions for tax purposes, and can beginning against a business'southward gross revenues.

Still, depending on the course of the business, such as whether it is a corporation or an LLC, and depending on how the compensation is characterized, it tin can take important tax consequences for the business.

 "Employees" versus "Volunteers" versus "Independent Contractors"

As a terminal indicate, it is important to mention that non everyone that provides services to a business is necessarily an employee. This is where employment police comes up. A business can hire health [assistance?] through a number of means, whether it is through employment, independent contractor services, or volunteers. Services tin be provided through vendors as independent contractors, or through volunteer services. With that said, information technology should exist added that information technology would be pretty unusual for officer positions of a business to be satisfied through something other than employee services.

Generally, the level of degree and control over the officer negates the legal elements that need to be nowadays for the person to be categorized every bit an independent contractor; and very few businesses are the blazon of businesses for which officers provide services for free (for instance, in "labor of love" type charities where no person receives any bounty for whatsoever services).

► Getting Legal Help

AXIS Legal Counsel'south Business concern and Corporations Practice provides legal advice to numerous businesses with a wide range of business matters. Axis  correspond pocket-sized, medium-sized, and big business clients with a broad diverseness of business and corporate law matters. Nosotros stand for early on-stage companies every bit well equally established businesses on a wide diversity of business law matters, ranging from contracts and transactions, intellectual property, labor/employment law, concern financing, mergers and acquisitions, real manor, insurance, concern succession planning, and general communication and counsel.  For information on retaining AXIS Legal Counsel to correspond your business organization in connection with any legal matter, contact info@axislc.com or call (213) 403-0100 for a confidential consultation.

Our Business & Corporations Practice

  • Corporate Police force
  • Small-scale Business
  • Contracts & Agreements
  • Labor & Employment
  • Intellectual Belongings
  • Shareholders
  • Directors and Officers
  • Mergers & Acquisitions
  • Business organization Sales
  • Business organisation Disputes
  • Securities Law
  • Cryptocurrencies

► Download All 2020 Business organisation Essentials Package – $49 Only

Cheque out our complete line of handy forms and templates for California small businesses.

Download Our Entire Suite of
Templates, Policies, and Procedures

Our 17 Most Pop Forms  – Only $ 49

*** Now UPDATED FOR 2022 ***

Instant Download!

►Submit a Question

Accept a question that is non answered? Submit your question below and then we can help other businesses by contributing to the knowledge base of operations.