Question on taxes from paying business to business and business to individual.

[JohnDS]

Hey guys. I have some questions regarding taxes when paying a business or receiving money from a business and paying an individual from a business.

I am licensed and own a small business. I kept it small and just used it for side money while I worked my full time job. I had decided to stop taking on work because I got so busy with my full time job. My friend that works in the electrical field talked me into picking up work again, but this time as partners. At this point everything remains in my name, company, insurance, business accounts, but we still split all those business expenses and any money we receive, 50/50.
When a company or an individual writes a check out to my company, I cash it against my business account, and then write my partner out a check for half the amount from the business account. My accountant advised that this is ok because I can send my partner a 1099 at the end of the year. He also advised I have my partner fill out a w-9 form, which I have had him do.
My question is:
1) Since I am charging sales tax to whomever is paying my company, should I still be sending my partner half of the total amount, or should i be deducting the sales tax from the total and then send him half of what is left over? This is the first year we've been in business together, so I dont know how sales tax is going to work out come tax time at end of year. I know that by me sending him a 1099 he will be taking care of his own federal and state, etc., taxes, but i dont know if this means he takes care of his sales tax too?

2) What about paying another company from my company? Lets say a company is doing work for a homeowner and gets me a job through this homeowner. The company wants me to tack on an extra $700 so they can make a few extra bucks. Now, instead of this company acting as a general contractor and submitting my price and theirs together(which i think is the way it should be done but this company does not do that), they want me to give homeowner total price with the extra $700 included. Not a problem. Now the customer makes check out to my company. So obviously I have to pay the other company the $700, but in my opinion, I shouldnt have to eat the taxes at the end of the year for them, so I write them a check from my company so I can write it off at end of year. My accountant also advised that I have this company fill out a w-9 form as well. Am I doing this correctly?

3) On the flip side of things, we do a lot of work for a particular franchise business. When we do work for this company, they obviously write out a check to my company. Not a problem, but why have they never asked me to fill out a w-9 form? They do not have my tin# so what should I expect to do at the end of year? Are they going to or can they still send me a 1099 at the end of the year, or do I just claim what checks I have cashed against my business accounts from them?

I am green when it comes to this sort of thing and I would really appreciate any help and advice your guys can give. Thanks you.

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[GoldDigger]

You are off to a good start by having an accountant, so I suggest you ask him those questions.
He can then explain things if you want.
As a general rule you should split the profits after expenses. If you contribute different amounts of labor you have to account for that.
A business paying money to another business under contract will not issue a 1099. That is for an individual non-employee or consultant.
Your partner will report the income as self employment income whether you give him a 1099 or not.
You declare your receipts from the other contractor as income to your business on Schedule C. Then deduct your expenses and what you 1099 to your partner and pay tax on what is left.
Partnerships can be tricky.
IANATA, YMMV, state taxes may be different.

PS: AFAIK the business sends sales tax to the state, not either of you.

 

[James Mcguire]

As we know no business is easy in this world there are so many complications when you start doing it. The same thing is happening with you. As i have read your problem i would like to suggest you should take the help of professional like accountant or charted accountant, because these people are dealing every day with such kind of things. They can tell you easily the write way to save your money as much you can.

 

[kwired]

When a company or an individual writes a check out to my company, I cash it against my business account, and then write my partner out a check for half the amount from the business account. My accountant advised that this is ok because I can send my partner a 1099 at the end of the year. He also advised I have my partner fill out a w-9 form, which I have had him do.

Is your partner also paying half the overhead expenses? Do you each have your own insurance, both liability and either workers comp or some arrangement that is clear that neither of you is an employee of the other? If you have workers comp insurance when they audit you they will want proof of insurance from any subcontactors you use, or else they will increase your premium to cover those that are not already covered - which your partner here is a subcontractor if you are reporting your payments to him via a 1099.

My question is:
1) Since I am charging sales tax to whomever is paying my company, should I still be sending my partner half of the total amount, or should i be deducting the sales tax from the total and then send him half of what is left over? This is the first year we've been in business together, so I dont know how sales tax is going to work out come tax time at end of year. I know that by me sending him a 1099 he will be taking care of his own federal and state, etc., taxes, but i dont know if this means he takes care of his sales tax too?

Sales tax is a little more complex then other expenses as it is money collected that isn't really yours, you are just holding on to it until it is time to file the sales tax return. But you should be deducting this from net receipts in similar way you deduct expenses before determining what is left over as profits, set those tax amounts aside somehow and pay them when they are due.

2) What about paying another company from my company? Lets say a company is doing work for a homeowner and gets me a job through this homeowner. The company wants me to tack on an extra $700 so they can make a few extra bucks. Now, instead of this company acting as a general contractor and submitting my price and theirs together(which i think is the way it should be done but this company does not do that), they want me to give homeowner total price with the extra $700 included. Not a problem. Now the customer makes check out to my company. So obviously I have to pay the other company the $700, but in my opinion, I shouldnt have to eat the taxes at the end of the year for them, so I write them a check from my company so I can write it off at end of year. My accountant also advised that I have this company fill out a w-9 form as well. Am I doing this correctly?

If the expense is a necessary cost of doing business it is deductible. Exactly what needs to have a 1099 filled out for isn't always perfectly clear, you really could send one out to everyone you ever pay, but it is more of a CYA form should you ever be audited. IRS does nothing with 1099's, in fact you don't even send anything to the IRS when you fill out 1099's. Those that receive them will use them on their personal tax return similar to how they would use a W-2 if the receipts are essentially personal income to them. If it is business income they keep them for potential audits but otherwise have already recorded their receipts as part of their business accounting, these are just additional proof of some of those records in a way.

3) On the flip side of things, we do a lot of work for a particular franchise business. When we do work for this company, they obviously write out a check to my company. Not a problem, but why have they never asked me to fill out a w-9 form? They do not have my tin# so what should I expect to do at the end of year? Are they going to or can they still send me a 1099 at the end of the year, or do I just claim what checks I have cashed against my business accounts from them?

I get same thing, some customers send a 1099 no matter what they paid you, others pay you quite a bit through the year yet never send you one. I never send one to my supply houses though I possibly could or even should, but I do have their invoices should I ever be audited and that is probably good enough. More important to send 1099's to whoever your accountant says you should send them to and not worry about who sends you any. But if they do send you one make sure you did report your receipts from them on your income. This shouldn't be a problem for those that keep proper records though.



If one partner is not paying half of expenses then it seems fair that the profits get split according to what percentage of expenses are being paid by each partner, also one has to assume each person is providing 50% of the work, including processing paperwork, planning, purchasing materials and supplies, etc.

 

[JohnDS]

We split every expense 50/50. So when I receive a check I split it right down the middle. But I am confused about the sales tax. When I send my partner a 1099, is he able to report his half of the sales tax we've collected? If not, then maybe I shoulde deduct sales tax from each check, then split that in two.

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[GoldDigger]

We split every expense 50/50. So when I receive a check I split it right down the middle. But I am confused about the sales tax. When I send my partner a 1099, is he able to report his half of the sales tax we've collected? If not, then maybe I shoulde deduct sales tax from each check, then split that in two.

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Exactly. The business files one set of sales tax forms with the state and it comes out of the income before it gets split.

 

[kwired]

We split every expense 50/50. So when I receive a check I split it right down the middle. But I am confused about the sales tax. When I send my partner a 1099, is he able to report his half of the sales tax we've collected? If not, then maybe I shoulde deduct sales tax from each check, then split that in two.

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Is your partner paying half the sales tax when it is due? Same for any other expenses?
If not then to be fair you need to adjust the proceeds to cover what was invested in expenses before disbursing.

 

[TobyD]

Is your partner paying half the sales tax when it is due? Same for any other expenses?
If not then to be fair you need to adjust the proceeds to cover what was invested in expenses before disbursing.

When I went into business I asked about a partnership.I thought I needed a partner to help do the work .I hired a couple of men to help with the work load instead of the partner I really wanted.Through the advice of my accountant he shared several pitfalls concerning a partnership that a small business owner could encounter.I try not to sub work from another contractor nor send any work their way.If that is the case things can become complicated form the taxes and workmans comp. and liability claims..Do the best you can to seek the advice from your CPA.

 

[electrofelon]

I dont know if when you say "partnership" you mean a formal legal partnership, or just more loosely that you and another guy work together sometimes. Either way, I would highly recommend forming an LLC and you both being members of the LLC. That would give you personal liability protection, simplify book keeping, allow you do bring on "new members" easily say for a few jobs and not have to deal with workers comp and payroll, and most accountants will tell you that you will pay less taxes with this sort of entity. Granting everyone's situation is different, but my LLC works super well. My partner and I dont even work together much and usually do our own jobs, but we do help each other out from time to time. The business has a checking account that we both use and we just transfer sales tax we collect into a savings account and pay it when its do. When a shared expense comes in such as insurance, our bond, contractors license, corp fees, etc, we just split it. I only pay a few hundred in taxes each year. It sounds like this type of thing may work well for you.