LLC How to pay someone for work that is not a contractor/employee

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LLC How to pay someone for work that is not a contractor/employee

Connor ODay
Member since 2021 · 4 posts · 0 votes

Hello Everyone, 

First post here on bigger pockets! Any advice is much appreciated. 

Little backstory: I bought two 4-plexes at the end of last year. Way in over my head. My girlfriend and son have been helping with all the maintenance, rehab, and other tasks. One property went into an LLC (the one that is currently making money). When I pay my GF/son I have been doing this out of my personal account, unrelated to the LLC. I have been researching and can't come to a clear conclusion on how to pay for their help via the LLC account.

The details I have found so far is I can put them on as employees (which I am also not sure how to legally do) BUT you have pay all the taxes and jump through the government hoops. The alternative is to pay them as contractors. They don't have their own business and to my comprehension this far, it is not as simple as just writing the individual a check from the business. 

I hope that somewhat makes sense. Essentially the help I receive is part time. Do I find a way to put them on as part time employees? Can I just write them a check from the business? Do they need to have there own Business/company/LLC to make this all come together?

Thank you so much!



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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
4y

@Connor ODay Yes, you can simply write them checks from your llc.  They don’t have to be “set up as a business”, at all.  They report the income on their tax returns, you need to issue them a 1099 if you pay anyone more than $600 (you can download them from the internet or get them at an office supply store) by January 31 of the following year.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y

    @Connor ODay Yes, you can simply write them checks from your llc.  They don’t have to be “set up as a business”, at all.  They report the income on their tax returns, you need to issue them a 1099 if you pay anyone more than $600 (you can download them from the internet or get them at an office supply store) by January 31 of the following year.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    They're either an employee or a business (sub-contractor). You can't pay them as another business because they have no legal business entity. You can write them checks but there is some potential liability for you if the IRS ever comes snooping. You know that they have no business entity, but are paying them as you would another business. That is fraud. You could even be held liable for paying their tax burden, SSI , etc if they don't.

    And you can't make them a legal Sub-Contractor either because you are providing them all of their work. They would have to have 2 other sources of business income to have a legit business.

    The only way for you to do this right is to hire them as employees and pay all of the associated costs to do so. 

    From the IRS:

    "You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an employee as a nonemployee, including yourself if you are a corporate officer, and you may be liable for a trust fund recovery penalty."

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  • Connor ODay
    OP
    Member since 2021 · 4 posts · 0 votes
    4y
    Quote from @Wayne Brooks:

    @Connor ODay Yes, you can simply write them checks from your llc.  They don’t have to be “set up as a business”, at all.  They report the income on their tax returns, you need to issue them a 1099 if you pay anyone more than $600 (you can download them from the internet or get them at an office supply store) by January 31 of the following year.


    Hi Wayne, thank you I was unsure if there were penalties if you write out a check to an individual or how that all worked. My girlfriend does a lot of work and she will definitely receive more than the $600. If I am understanding correctly, pay her through the company from here on out, let her know that I will report the income and she will need to plan to have that on her taxes? Is there anything you suggest further on my end that should be done? Appreciate you!

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  • Connor ODay
    OP
    Member since 2021 · 4 posts · 0 votes
    4y
    Quote from @Bruce Woodruff:

    They're either an employee or a business (sub-contractor). You can't pay them as another business because they have no legal business entity. You can write them checks but there is some potential liability for you if the IRS ever comes snooping. You know that they have no business entity, but are paying them as you would another business. That is fraud. You could even be held liable for paying their tax burden, SSI , etc if they don't.

    And you can't make them a legal Sub-Contractor either because you are providing them all of their work. They would have to have 2 other sources of business income to have a legit business.

    The only way for you to do this right is to hire them as employees and pay all of the associated costs to do so. 

    From the IRS:

    "You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an employee as a nonemployee, including yourself if you are a corporate officer, and you may be liable for a trust fund recovery penalty."


     Hi Bruce, 

    Thank you for your insight. If I am hearing you, there is no middle ground. They either need to be an employee or have their own established business with 2 alternative incomes aside from what I pay, correct? Middle ground being that I can't just pay them from the company to an individual (for the reasons you listed above). My GF has discussed starting an LLC with her mother and offering cleaning/repair/Misc services. If they accomplished this and found 2 incomes plus what I pay them within the year, would this meet what the IRS is seeking?

    It sounds like you are well versed in the subject. May I ask, if I put my girlfriend on as a part time employee, is it worth the costs associated OR is it more advantageous for them to start the cleaning company?  Much appreciated!

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    @Connor ODay Yes I have a lifetime of dealing with this subject - everyone is looking to do an end-around on the IRS, both companies and workers. You are right, there are only the 2 ways basically. (You can do stuff like start an S Corp (or C Corp) and then not have to do this with family members only, but that's a big pain.)

    In my experience she would be better off starting her own business by far. Not only would it be all legit, but she also would have the benefit of writing off a lot of expenses. And more.

    And less paperwork for you..... :-)

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  • Hannah Atherton
    Real Estate Broker · Portland, OR · Member since 2021 · 16 posts · 12 votes
    4y

    @Connor ODay the only thing I would add to @Wayne Brooks is that your GF and Son can each start their own business by creating a Sole Proprietorship or whatever entity formation works easiest for each of them (you can consult a lawyer as well to form it but should be able to do on your own as well). She can look on the Secretary of State Website for Nevada. Not sure if they'll allow this website paste but: https://www.nvsos.gov/sos/busi...

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  • Connor ODay
    OP
    Member since 2021 · 4 posts · 0 votes
    4y
    Quote from @Hannah Atherton:

    @Connor ODay the only thing I would add to @Wayne Brooks is that your GF and Son can each start their own business by creating a Sole Proprietorship or whatever entity formation works easiest for each of them (you can consult a lawyer as well to form it but should be able to do on your own as well). She can look on the Secretary of State Website for Nevada. Not sure if they'll allow this website paste but: https://www.nvsos.gov/sos/busi...


     Hi Hannah, perfect thank you for the advise. She had actually talked starting a Sole Proprietorship and wanted to get more info on that! I am very excited to get the business expense paid by the business instead of through the personal account. 

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