taxes, llc, payment, partnership, contractorsSo my partner and I started an LLC. We just got an opportunity to obtain our first client. We want to make sure we handle all the payments and income so we can stay on par with the IRS.
Our financial structure,
Our company bids out a deal. From that deal, 5% is profit for the company. The rest is paid to the person doing the contracted worker (which is just us 2 right now)
In a normal llc, everything is passthrough. So say my partner and I split everything 50/50 and then we will record that on our personal tax forms. What we want to do is make it so we can do 50/50 AFTER 5% is taking off the top to make the company grow and handle its own expenses.
How do we tax the 5%? Do we tax the company itself as a corporation or is there another method of taxation where the money doesn’t hit the owners banks.
Also we are bid on an hourly rate, how do we record that as ‘income’.
Say we do $1000 in hourly work. The company keeps 5% or $50. We will then say that was profit for the company and at the end of the year pay the set tax for it? Or do we pay when we make the $50.
Then $475 each gets paid to us each. I will record that at the end of the year as a self employed income when filing for my return.
Is this correct? What am I missing?
Now say we keep the same structure. It’s just my partner and I and we have a client. We agree that he gets 100% of the pay after the 5% and I’m getting 0% for not doing any work (as agreed). Is there an issue with our year end income being different given that we are 50% owners of the company.
What kind of documentation other than tax forms do we need? Do we need to keep records of checks and invoices that will need to be sent to the IRS or is it taxed based on my saying I made that much income. Are there bank statements that will need to be provided on behalf of the company?
Any insight is appreciated, like I said we just want to start off on the right foot with the IRS.
Thanks
First of all, you need to keep detailed records. This includes receipts, checks, bank statements, etc… You should also be using some type of online software like QuickBooks to track everything.
For your typical deal, the total “revenue” is $1,000. Your client will send you a check or pay you via Paypal or credit card. Keep that payment evidence as proof. Next, you will be paying $475 and $475 to each partner which are “expenses” to the LLC (as long as you and your partner are external 1099 vendors). The “net profit” of $50 which is left over, is taxable to the LLC.
At year end, you add up all the totals for the year for revenue and expense (QuickBooks can do this for you in seconds), and if you have more revenue than expense you will have to pay taxes on it. Your totals are input on tax forms and submitted to the IRS. Hire a tax firm or CPA to do this for you - they will generally ask for some backup like bank statements.
Now, if you ever get audited by the IRS, then you will need to show receipts or some type of backup for all your numbers. If you don’t have a receipt, they treat it like it never happened. So if you keep paper copies, buy a fireproof safe. Or scan everything into your computer - but always have a way to backup your data (like Carbonite.com)
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