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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I own an LLC and work for it myself. I have a really good friend

Resolved Question:

I own an LLC and work for it myself. I have a really good friend who owns the same type of residential service business. We are VERY interested in making arrangements for his business to answer calls for my business and run the jobs from those calls. I would then get a set fee per week or a percentage of the jobs the mselves. My business is set up to where it naturally grows by about 10-15% annually. I am trying to figure out what would be best method to be paid for this arrangement...personally as a 1099, to my LLC (where I may have to pay local Transaction Privilege Taxes...not sure), or some other way. It's the "some other way" I am interested in... How can I get paid for this and avoid having to pay Self Employment Taxes or FICA/Medicaire taxes? If I in exchange for stock in my friends company receive dividends, is there a way to make something like that happen? Just trying to think outside the box. I am talking about $52k annually from arrangement, increasing $5k-$8k annually thereafter. I'm also in a position where depositing large amounts (over $200) into personal accounts are unwise due to old debt holders out there who are trying to sue me and take money from those accounts. I have been slowly paying them off, but there are a few large ones remaining and don't want to wake up one day with an empty bank account. I guess I could just cash the checks, huh? What's my best way of moving forward with this arrangement?
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Customer:

Ok

Stephen G :

The botXXXXX XXXXXne is that unless you set yourself up as an S-Corp, or report the LLC as an S-Corp, put yourself on the payroll and go through a lot more formalized recordkeeping, you aren't going to be able to avoid self-employment taxes; and even if you were to do all those things, you would not be able to avoid all of the Social Security & Medicare tax; plus if your creditors have judgments against you, they could garnish your wages; so you would be much better off in the long run if you just continue to report your income on a Schedule C on your income tax return & either do business under a d/b/a or make sure you don't let money build up in your bank accounts.

Customer:

yeah, pretty much what I have been doing all along. Was wondering if I had other options. What about dividends from his business?

Stephen G :

You can't receive dividends unless you own stock in his business; then all the stock has to receive the same dividends; plus dividends are not deductible, so I doubt very much that is even a possibility.

Customer:

So, assuming I continue Sched. C., do you think I would still have to pay TPT ("Sales Tax") to state and cities you think? My buddies business would pay those taxes for the jobs he runs. I am trying NOT to sell my business to him and trying also to keep this simple as possible for both of us. I think the way we are doing it is best for now, but the sales tax thing still lingers...that would be double taxation wouldn't it?

Stephen G :

Sales taxes are paid by the customer, not the vendor.

Stephen G :

Income & sales taxes are not the same type of tax, if that's what you mean by double taxation.

Stephen G :

Federal tax & State tax that are both paid is not double taxation.

Stephen G :

I'm not sure what you are referring to.

Stephen G :

The sales tax is only paid once by the ultimate consumer of the service if services are taxed in the jurisdiction you are doing business in.

Customer:

I am talking about Transaction Privilege Taxes (TPT). 65% of my bill is taxable at the State and Local rates (usually around 9% or so depending on which city job is performed). It's not exactly a "sales tax", but it's very similar. Contractor's get taxed approx. 9% on 65% of the job in Arizona.

Customer:

There is a way to avoid this tax on my business's part similar to if I do work for another contractor as a sub-contractor I don't have to pay sales tax. I just need to figure that part out since I have never done before. I am sure each state is different in how they handle this tax.

Customer:

I will figure it out on my end. Thank you for your advice on the other questions I had.

Stephen G :

Arizona is the only state that has a ""TPT" tax. Other states have sales taxes.

Customer:

oh wow didnt know that

Customer:

AZ just likes to be different, but it's a beautiful state and we have been here for 9 years (I'm from Upstate NY - Poughkeepsie) and love it (except in July-August when it's 110-115 degrees out).

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 4 other Tax Specialists are ready to help you

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