Another Partnership Question

[Rye1]

Okay, I've been in buisiness for a little over four months. We are starting to do "okay". A very good friend that I've worked with for years is interested in working with me - part time. He is an excellent engineer with great contacts. This could be a good situation.

Since he needs to continue where he is at (they have a good moonlighting policy) how should I treat him for tax purposes? I'm thinking as an independent contractor but that gets kind of murkey because I will be sealing the work (done under my surpervision) and under my companies insurance.

Thanks for reading...
Rye
New River Engineering, PLLC

http://www.newrivereng.com

 

[GregLamberson]

Rye1

You didn't mention, but I assume you are currently a partnership (you mentioned "we")?

Unless you want to get into an employee and all of the issues that go with it (W2's, benefits, policies, etc.) you will want to do a 1099. If you do so, you need to make sure you treat him as an independent contractor with an independent contractor/consulting contract.

I don't see anything murky about it. However, if you do have a partner, he/she will need to buy into the arrangement.

The only other thing I would caution is to make sure, especially becasue he/she is an old friend, everything is done professionally, i.e. no verbal scope of works, no verbal agreements - everything needs to be handled as if you were hiring a 3rd party engineering company to do work for you because that is exactly what you are doing.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[Rye1]

Thanks Greg, that is some very good advise.

I've not considered a third party contract. This seems like the best option - lay out everything on the table so nothing is assumed.

 

[GTstartup]

Be careful with the independant contractor route. You can't go around willy nilly calling every body an independant contractor just because it's more convenient.

If the IRS decides that, in fact, he is an employee and only designated an independant contractor to avoid tax liablity on your part, you could be liable for back taxes and penalties. Especially if your "independant contractor" "forgets" to pay all his taxes SS Medicare etc.

Some of the ways that the IRS determines this is if he is using your facilities exclusively, i.e desk, office supplies, computers or if he has no other clients, he may be considered an employee. The fact that he doesn't have his own insurance will be a red flag.

You might want to consult with a tax lawyer to avoid any "surprises"

 

[GregLamberson]

I would not consider utilizing a third party, who works for another company and who will do part time work for me under a consulting contract as willy nilly.

Generally you will need to meet the following:
1. Have a consulting contract
2. He sets his own work hours and excercises little control over your work
3. He is engaged in work for others
4. He is paid as a consultant (1099)
5. He does not consider himself an employee
6. He/you has the right ot terminate the relationship without liability.

Again, I see no issues, but you do need an independent contractor contract and you will need to issue him a 1099. There should also be an affadavit form you can get through your state that provides the outline/checklist of the independent contractor status and is filled out & signed by the consultant - you keep it on file.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[GTstartup]

OK "willy nilly" maybe a bit strong, I guess abritrarily would be a better word.

Items 1,4, and 5 are self serving decisions to attempt to avoid employee taxes. 3 and 6 also apply to part time workers. Only 2 would seem a legitimate part of being an independant contractor.


There is a form you can fill out and the IRS will tell you up front if he is an independent contractor or a part time worker.

http://www.irs.gov/pub/irs-pdf/fss8.pdf

I am not suggesting you fill it out necessarily, but just checking it out, will at least give you some idea of the things they look at to make a determination.

For example


QUESTION 7 (part 2)

"At what location(s) does the worker perform services (e.g. firm's premises, own shop, or office, home, customer's location, etc)? Indicated the appropriate percentage of time the worker spends in each location, if more than one."

Reading between the lines, this would indicate to me that he should be working atleast part of the time at his own location, this might interfere with you being able to seal his work.

As I said before, you might want to consult a tax lawyer. Most independant contractors are actively pursuing other clients, don't work full time for somebody else, have their own insurance, own location, use their own tools etc.

 

[pmadson]

We went through this a few years ago when we were starting out and our biggest surprise came from our insurance carrier.

Make sure you check with your liability insurance carrier before deciding if this will be a subconsultant or an employee relationship. Many carriers require that subconsultants performing professional services have their own policy that name you as Additional Insured. If you use an uninsured subconsultant, your carrier may be able to deny coverage to you if you were to ever get sued over that particular project.

The way around this would be to make him a part time employee. But this would require witholding payroll taxes, paying the employer's portion of FICA, paying unemployment taxes, worker compensation, etc. This takes a lot of time to figure out how to do it properly, unless you want to spend the money on a payroll service to do it for you.

You can also get around this by having him buy into the partnership with you and notifying your insurance carrier.

We ended up making the engineer a part time employee, which worked out fine once we figured out all of the details.

Pete Madson

http://www.npcg.net

 

[Ashereng]

I would suggest you both incorporate as businesses. Then, you simply invoice the other "comnpany" for services/goods like any other 2 comnpanies.

"Do not worry about your problems with mathematics, I assure you mine are far greater."
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

 

[Dumbo2929]

Remember, partners are for dancing. All partnerships will end at some point, so plan for the demise from day 1.