Originally posted by @Michael Plaks:
@Bruce Gardner
Short answer first. The IRS does not really care how much you pay the other person, as long as it is reported by you and him. It is always deductible for you, but it becomes taxable to him. In other words, you merely shift your income from you to him. The IRS still gets paid.
Now, a longer answer and caveats.
1. The payment has to have some business reason. You cannot simply shift income to someone not involved in your business. Otherwise, we all will be shifting income to some low-income relatives or friends. You need to have a reason why he deserves half of the income, and there could be many reasons.
2. Be careful treating him as a contractor. If you treat him as a contractor, he will owe Social Security and Medicare taxes. It is only fair if he provided actual work to earn his half. Otherwise, you will add taxes where they did not exist, because rental income is not normally subject to SS/Med taxes.
3. Additional reason to consult a tax accountant: you seemingly do not understand the difference between a 1099 contractor, a partner, and other ways to structure to it. Your best bet is probably to issue a 1099-MISC with Box 3 "other income" - but this advice may change if I knew more about your arrangement. That's why I say - ask a pro.
4. I suspect that you're not telling us the whole story. There's likely something else that you're trying to accomplish, and you decided that paying him half of the income solves that problem. There could be better ways if you disclose the full story.
5. Your deductions could be limited on your side, for various reasons. For example, high income.
Thank you!
#1: Absolutely. The payment will be for someone running and managing 100% of entire project(s). Project management, property management, GC, deal finding, etc. Basically I would be paying someone to "do everything" with my money in an investment deal.
#2: Interesting, I didn't know this - I'll have to investigate further. I thought this only applied to W2 employees.
#3 & #4: Makes sense. You've got great instinct!
#5: Good point, something to consider!
Basically, I'm trying to decide between two scenarios:
(a) Partner with someone on a deal (their work, my money) and split the profits 50/50, or,
(b) Pay someone 50% of the profit for doing all the work. It seems the latter is the most beneficial to me, but may not be the most beneficial to the contractor? I originally looked at this scenario as a no-brainer because I thought they get the same money no matter what. But maybe that's not true if SS/medicare taxes are involved? I thought that only applied if they're a W2 employee?
Thank you all for the responses!
