Three of us from the family - me, my wife, and my mother work together - small business. It is an LLC where my wife and I are owners, my mother gets a 1099 for her earnings at end of the year. We trust each other 100%. From a taxation perspective, I think it is the same for my mother - whether she gets 1099 or K-1: She will end up paying self employment taxes in either case. So total tax for her remains the same whether she is a partner or a contractor. I am thinking what are the other things I should keep in mind when making her a partner from contractor? As mentioned before, trust is not a problem, all three of us trust each other completely
If I understand your question, your mother is NOT an owner in the business. For an LLC, a K-1 would be the distributable share of income, loss, etc. for OWNERS in the business. If your mother is not an owner she would not receive a K-1.
With that said, the relevant question seems to be whether your mother should receive a 1099 or W2. This is contingent on whether your mother is ACTUALLY an employee or and independent contractor in the eyes of the IRS.
If she were a W2 employee she would not have to pay self-employment tax because withholding would be taken out of her wages and submitted to the IRS on likely a quarterly basis.
Also, you should be aware that there could be filing requirements from the FL DOR.
Without knowing more about the situation, I cannot provide more specifics. However, the issue appears to be relating to the proper classification of your mother and ensuring that you abide by the proper filing and withholding requirements.
I would recommend you seeking counsel to avoid issues down the line.
It is definitely not the same tax treatment for a 1099 versus a K-1. A 1099 is subject to self employment tax before the application of income tax, whereby a K-1 is a partnership return subject to an income tax. There are a couple of different avenues you can take with this development. First and foremost, your partnership should have an operating agreement or a partnership agreement in place. As a partnership dispute attorney it has been my experience that every business starts with and even maintains trust, as that trust is necessary to conduct business, but even with family businesses the smallest dispute can turn into a full partnership dissolution. It has been my experience that family businesses that end in disputes are the hardest to resolve. Without having an operating agreement or partnership agreement in place between the members/partners of the company, the litigation becomes a "he said, she said" mess that in most circumstances costs more than the company is worth to litigate for all parties. A formation agreement, as in operating agreement or partnership agreement, will outline how disputes are handled among the owners as well as a road map agreed that outlines a resolution for every circumstance that may arise within the company in addition to disputes, from "death to taxes". The corporate statutory code generally refers back to the operating or partnership agreement for governing terms since we live in a purely capatalistic society. So, if your company is performing well, invest some money into a formational agreement to avoid investing an exorbitant amount of money later should a dispute ever arise.
As far as your mother, there are a couple of options. If she were to become a member of your company, you would have to either sell or authorize and issue more units for her membership, which requries a few steps and a few contracts. If you would like to maintain her position as an I/C to keep things simple if she is not demanding a membership interest in the company, it may help your mother to incorporate a standard corporation as a holding company as an S-Corp, for all payments made from the company to be made to that corporation rather than her personally. Corporations can receive payments as independent contractors and are not subject to a 1099, which will help your mother with avoiding the 15% self-employment tax. Plus, all monies spent from the money earned through her S-Corp for business purposes would be pre-tax dollars, and less subject to scrunity compared to taking business deductions from personal income taxes.
Our firm assists clients with their formation and contracts for formation. We would be more than happy to offer your family a free consultation to assist with the structuring of your LLC, discuss the benefits of having an operating or partnership agreement as well as discussing what would best suit your mother and your partnership as to her relationship with the partnership. Please call (561) 939-8042 to schedule a free consultation to discuss your options and review your current membership structure.
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