Hiring a laborer for first rehab-what do I need to do?

Question

My younger brother will likely be doing some of the general labor around my first rehab project. He is going to likely be using some of his hours towards his internship program at school to graduate. I'm curious, what all needs to be done in order to pay him legitimately in the eyes of the IRS?

Do I need to have a company established? What paperwork does he have to fill out? Do I have to provide him with insurance?

Thanks for your input.

Do I need to have a company established?  What paperwork does he have to fill out?  Do I have to provide him with insurance?

Thanks for your input.

James Vermillion · Answer

If you use a general contractor you will only need to worry about a 1099 for that person, but if you use separate subs you will need to file a 1099 for each of them (that is paid over $600 in the year).  I track everything in QuickBooks which allows me to print a 1099 report at the end of the year to see who I need to issue one to.

I have all people who do any work for me fill out a W-9 (Request for Taxpayer Identification and Certification) prior to starting any work.  I file this information so I have what I need when I issue the 1099s (at the end of the year).

Steve Babiak · Answer

Some incorrect info in that quote.  Get the W9 completed - a company should use the Tax ID rather than SSN.  A company does get a 1099, unless it is incorporated; any LLC should be issued a 1099.

Geri Johnson · Answer

Your first time you want to keep it simple.  You can do your taxes in Turbo Tax or some similar entity next year.  If you are using day laborers to dig ditches, landscape, clean, etc. just use a bunch of different ones so that you don't pay any one person more than $600.

For laborers that you pay more than $600 then you will need to file a 1099 when you do taxes (Turbo Tax or Quick Books can do the 1099s), but you need their SSN and other information (W9).
If you are paying a company, such as ABC Glass Company, or XYZ Window Company then you do not have to do anything for taxes.  You only have to 1099 independent workers who do not have a legal company entity.

James Vermillion · Answer

This link might help as well:

http://www.irs.gov/businesses/small/article/0,,id=179114,00.html

James Vermillion · Answer

I would be very cautious about paying an attorney a bunch of money to setup an entity (and I am typically very cautious about these things).  Look into the process in your state...I was able to set mine up myself very easily.  If you are going to pay an attorney speak with several, I would imagine this would be something that pricing would vary quite a bit on.

Steven Hamilton II · Answer

Ryan Tam,

Welcome to the board. I'll send you a PM.

Yes you can give family a gift of up to 13k tax free each year.  Anything over that a gift tax return will be required.

Once you are in the business of flipping homes you will be paying tax at your ordinary rate.  An LLC will not have any effect on that unless you are operating as a C-Corp.

As a C-Corp, you will pay corporate tax and then capital gain rates on your dividends.

Capital gain rates are dependent upon your tax bracket. The only way it will qualify as capital gains is if it is your personal residence or you are not in the business of flipping homes.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Ryan Tam · Answer

It depends on how close you two are.  My dad helped me out on remodeling my home for free and I gave him a nice gift at the end of it.  You are allowed to give family gifts tax free.  No need to involve the IRS if it's only family members giving each other gifts.

But if you want a business trail, then yea, just give him a 1099 and let his accountant/TurboTax deal with it.  No need for you to have a separate tax entity for this.  You probably would need that LLC if only you want to do quick flips and avoid the capital gain tax.  If you hold it for a period, there is no big problem there either.  Taxes for long term investments are about same as regular income tax (depending on your bracket).  Check with your account for details.

Rob Gillespie · Answer

Keep it simple, It is his job to carry his own insurance as an independent contractor. Just give him a 1099 at the end of the year. The bigger problem here is hiring family! LOL!

Steve Babiak · Answer

First determine whether they are somebody's employee or not; if an employee of somebody, then that somebody will need to have liability coverage AND workmen's comp coverage to be considered "fully insured".

If not an employee, but a sole proprietor, then you still want them to have liability coverage.  But most sole proprietors won't have workmen's comp coverage, so in those cases you would want to get them to sign a waiver in the event they are hurt on your job.

David Robertson · Answer

Should I have the independent workers sign a waiver to limit my liability if one of them gets injured?

Hiring a laborer for first rehab-what do I need to do?

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