Whoa here. First off, I'm not an accountant or CPA, I'm a geologist on an oil rig.
I subcontract part of that work out. My subcontractors have their own company, established prior to any relationship between our two businesses, and the business to business relationship is all there has ever been.
Small (one person) consulting companies are all over the oil patch, so this is nothing unusual.
Forgive me for the apparent nomenclatural blunder, but what I meant by "shield" was that they, at their option could establish and contribute to their own company's (owner operated) LLC's SEPP.
In our age group, that contribution can be substantial (up to $50K).
The larger the contribution, the less of their LLCs income is taxable, and the reduction in tax bracket for the income which is left over after that is a force multiplier.
So I am guilty only of an unfortunate choice of words, not tax evasion.
The Government got enough out of me last year to support a welfare family in all its glory, and this year will be much the same.
Im not a CPA either but I have over 20 years of experience in payroll and HR compliance and many years of experience in corporate accounting.
In your industry and from what you described; hiring contractors/ consultants who operate their own business is totally legitimate and perfectly legal. There is nothing wrong with a business hiring small one person business or LLCs to perform work under an independent contractor arrangement. I have done such consulting work myself, part time while I was employed full time for another company and for a time as a 100% self employed consultant for a few years.
What I was cautioning against was those business who try to classify or re-classify employees, especially obviously hourly non-exempt employees as independent contractors either out of ignorance of the law or purposely as a way to avoid paying employment and unemployment taxes and pay overtime under FLSA. Sadly there are some unscrupulous employers who skirt the law and convince their employees that this is a beneficial arrangement when in reality, more often than not, it isnt and the employee who is not operating a business and knows nothing about the tax implications, ends up getting screwed nine ways to Sunday.
The Government got enough out of me last year to support a welfare family in all its glory, and this year will be much the same.
You are not alone in that.