If we rent the home to him, and he lives in it (legally, has utilities in his name, etc.), as a tenant, he can do work on the home without needing to be an employee, correct? 

An example would be to utilize a limited partnership to restrict the control that the financiers (limited partners) have.

The lease includes an itemized list of utilities including Water/Sewage, PG&E and Wifi.

How utilities were split.

He owns a house that has a "tenant" -- however, this tenant has NOT paid rent or utilities in 18 years (don't ask -- I don't know why my uncle allowed this to go on). 

When analyzing a potential deal, I've been factoring in the following:leasing fee (1/12th rent per month) PM Fee + 7.5% CapEx 7.5% Repairs Principle + Interest Taxes/monthInsurance/mo Vacancy (10%)... going with the thought that tenants in single family rentals will be responsible for mowing the lawn and all utilities written into PM contract.

Utilities are separate and I would have the tenant pay them.

If you're willing to extend your reach to Phoenix or Atlanta, let me know.I don't work in NY, but I'd look at attending local REI meetups and of course utilizing BiggerPockets.

(Not trying to avoid taxes or anything similar)It seems that utilizing a LLC, established in New Mexico/Wyoming for example, may be the best way to achieve this, as a holding company. 

A great book that breaks down complicated financial strategies that you can utilize in your own business.