Pay team mates out of revenues on my name
"Can I deduct the money that I giving to my team mates from the taxes   that I pay? If yes, how should I record the transaction? Why? Why are you giving money to your team mates? That's the most important question, and any answer without taking this into account is not full. You would probably have to talk to a professional tax adviser (a CPA/EA licensed in your state) about the details, but in general - you cannot deduct money you give someone just because you feel like it. Moreover, it may be subject to an additional tax - the gift tax. PS: We don't have any partnership or something similar, it is just   each of us on his own. Assuming you want to give your team mates money because you developed the project together - then you do in fact have a partnership. In order to split the income properly, you should get a tax ID for the partnership, and issue a 1065 and K-1 for each team mate. In most states, you don't need to ""register"" a partnership with the state. Mere ""lets do things together"" creates a partnership. Otherwise, if they work for you (as opposed to with you in the case above), you can treat it as your own business income, and pay your team mates (who are now your contractors/employees) accordingly. Be careful here, because the difference between contractor and employee in tax law is significant, and you may end up being on the hook for a lot of things you're not aware of. Bottom line, in certain situation you cannot deduct, in others you can - you have to discuss it with a professional. Doing these things on your own without fully understanding what each term means - is dangerous, and IRS doesn't forgive for ""honest mistakes""." Note:  This is not professional tax advice.  If you think you need professional tax advice, find a licensed professional in your local area. What are the expected earnings/year? US$100? US$1,000?  US$100,000?  I would say if this is for US$1,000 or less that registering an EIN, and consulting a CPA to file a Partnership Tax return is not going to be a profitable exercise.... all the earnings, perhaps more, will go to paying someone to do (or help do) the tax filings. The simplest taxes are for a business that you completely own.  Corporations and Partnerships involve additional forms and get more and more and complex, and even more so when it involves foreign participation.  Partnerships are often not formal partnerships but can be more easily thought of as independent businesses that each participants owns, that are simply doing some business with each other. Schedule C is the IRS form you fill out for any businesses that you own. On schedule C you would list the income from advertising.  Also on schedule C there is a place for all of the business expenses, such as ads that you buy, a server that you rent, supplies, employees, and independent contractors.  Amounts paid to an independent contractor certainly need not be based on hours, but could be a fixed fee, or based on profit earned.   Finally, if you pay anyone in the USA over a certain amount, you have to tell the IRS about that with a Form 1099 at the beginning of the next year, so they can fill out their taxes.  BUT.... according to an article in International Tax Blog you might not have to file Form 1099 with the IRS for foreign contractors if they are not US persons (not a US citizen or a resident visa holder).
"It seems that you think you are freelancing, and they think you are an employee. What's bad for you, the tax office will also think you are an employee if they withhold tax for you. Alternatively, they think you are stupid, and they keep the money, but are actually not paying it to the tax office at all, in which case you will have a bad surprise when you do your tax returns.  First, I'd ask them for proof that they are indeed paying these taxes into some account related to you. I'd then ask a tax adviser for some serious advice. If they are acting out of incompetence and not out of malice, then you should be mostly fine, but your work there will count as employment.  Heaven knows why they treat you as an employee. Check your contract with them; whether it is between you and them or your company and them. It maybe that they never hired a contractor and believe that they have to pay employment tax. They don't. If your company sends them a bill, then they need to pay that bill, 100% of it, and that's it. Taxes are fully your business and your responsibility. As ""quid"" said, if they say they are withholding tax, then at the very least there must be a paystub that proves they have actually been paying these taxes. If they withhold taxes, and there is no paystub, then this looks like a criminal attempt to cheat you.  If they have actually paid taxes properly into your account, then they are merely creating a mess that can hopefully be fixed. But it is probably complicated enough that you need a tax advisor, even if you had none before, since instead of paying to your company, they paid some money to the company, and some to you personally." "You are confusing entirely unrelated things. First the ""profit distribution"" issue with Bob's S-Corp which is in fact tax evasion and will probably trigger a very nasty audit. Generally, if you're the sole employee of your own S-Corp, and the whole S-Corp income is from your own personal services, as defined by the IRS - there's no profit there. All the net income from such a S-Corp is subject to SE tax, either through payroll or through your K-1. Claiming anything else would be lying and IRS is notorious for going after people doing that. Second - the reclassification issue. The reason employers classify employees as contractors is to avoid payroll taxes (which the IRS gets through Bob's S-Corp, so it doesn't care) and providing benefits (that is Bob's problem, not the IRS). So in the scenario above, the IRS wouldn't care whose employee Bob is since Bob's S-Corp would have to pay all the same payroll taxes. The reclassification is an issue when employees are abused. See examples of Fedex drivers, where they're classified as contractors and are not getting any benefits, spend their own money on the truck and maintenance, etc. The employees are the ones who sued for reclassification, but in this case the IRS would be interested as well since a huge chunk of payroll taxes was not paid (driver's net is after car maintenance and payments, not before as it would be if he was salaried). So in your scenario reclassification is not as much a concern to Bob as his tax evasion scheme claiming earnings from performing personal services as ""profits from S-Corp"". A precedent to look at, as I mentioned elsewhere, would be the Watson v Commissioner case." From my understanding, only A and B are shareholders, and M is a managing entity that takes commission on the profit. Assuming that's true.  At the start of the project, A contributes $500,000. At this point, A is the sole shareholder, owning 100% of the project that's valued at $500,000.  The real question is, did the value of the project change when B contributed 3 month later. If the value didn't change, then A owns 33.33%, and B owns 66.66%. Assuming both A and B wants to pay themselves with the $800,000 profit, then A gets a third of that, and B gets the rest.  However, if at the time of B's contribution, both parties agreed that the pre-money of the project has changed to $1 million, then B owns half the project valued at 2 million post-money. Then the profit would be split half way. "You're a partnership. You should ask the money to be paid to the partnership. You'll have to fill partnership income tax return (form 1065) and each of you will get a K-1 schedule with your own personal portion of the income. For example, you're Adam, Ben and Clara. You work together on a project and are being paid. You get a check for $300 issued to ""Adam, Ben and Clara, DBA ABC Partnership"". You don't have to have a DBA, it just makes it easier to show you as a single entity. You then deposit the check to an account you set up for your partnership, and from that account you transfer $100 to each of you. Year end, you file form 1065, showing $300 income, and attach K-1 for each of the partners showing $100 income. That $100 income will flow to your individual tax returns. The overhead here is setting up a partnership account, potentially making a DBA, and filing the extra tax return. That's the proper way to do it, especially if it is something you're going to do regularly. For a one-time thing, one of you can get paid, report it as income on his/her Schedule C, and issue 1099 to the rest of you for your parts, and deduct the amount as his/her expense. Here, the overhead is Schedule C for each of you (instead of Schedule E if handling it as a partnership), extra 1099 forms (instead of 1065 and K-1s), and a risk of one partner defrauding the others (depends on how much you trust each other). With proper documentation, each of these is equally legal, and tax-wise the costs are the same (i.e.: either way you pay the same taxes). With partnership the overhead is a bit more expensive (DBA+1065 extra cost), but in the long term it will make your life easier if you do this kind of thing regularly. You may want to consider setting up your partnership as a LLC/LLP (depending on what your State allows), but that would require State paperwork and potentially more fees." Typically, no. Unless you have a detailed agreement spelling out the apportioning of costs, all operating expenses are deducted from gross income first, with the division of the proceeds coming out of net profit, in accordance with the type and % of shares you own, and per the terms of the shareholders agreement. This is a simplified answer, and does not address other methods of extraction, such as wages paid, loans to shareholders, interest paid on loans from shareholders, etc.. "The answer depends on this: If you had to hire someone to do what you are doing in the S-corp, what would you pay them?  If you are doing semi-unskilled work part-time, then $20k might be reasonable.  If you are a professional working full time, it's too low.  Don't forget that, in addition to ""billable"" work, you are also doing office tasks, such as invoicing and bookkeeping, that the IRS will also want to see you getting paid for. There was an important court ruling on this subject recently: Watson v. Commissioner.  Watson owned an S-Corp where he was the sole employee.  The S-Corp itself was a 25% owner in a very successful accounting firm that Watson worked through.  All of the revenue that Watson generated at the accounting firm was paid to the S-Corp, which then paid Watson through salary and distributions.  Watson was paying himself $24k a year in salary and taking over $175k a year in distributions.  For comparison, even first-year accountants at the firm were making more than $24k a year in salary.  The IRS determined that this salary amount was too low.  To determine an appropriate amount for Watson's salary, the IRS did a study of the salaries of peers in firms of the same size as the firm Watson was working with, taking into account that owners of firms earn a higher salary than non-owners.  The number that the IRS arrived at was $93k.  Watson was allowed to take the rest ($80k+ each year) as distributions. Again, this number was based on a study of the salaries of peers.  It was far short of the $200k+ that the S-Corp was pulling in from the accounting firm.  Clearly, Watson was paying himself far too low of a salary.  But even at this extreme example, where Watson's S-Corp was directly getting all of its revenue from one accounting firm in which Watson was an owner, the IRS still did not conclude that all of the revenue should have been salary and subject to payroll taxes. You should ask an accountant or attorney for advice.  They can help you determine an appropriate amount for your salary.  Don't be afraid of an audit, but make sure that you can defend your choices if you do get audited. If your choices are based on professional advice, that will help your case.  See these articles for more information:" If this is a publicly traded company, I'd be thinking the shareholders should take a long hard look at this.  This is a man who hates his employees more than he likes money.  A spite-based decision is obviously going to be inferior to a money-based decision.  And shareholders want money. I know a guy on a much higher rate than me, about £500 per day, and he claims to pay around 18% tax which has me bewildered He will be showing expenses, which are deductible. Check with your accountant about expenses, which can be legally claimed as expenses. This is the main benefit of operating through a limited company. Legtimate business expenses can be claimed, which you cannot do if you are a permanent employee. Your friend might also be claiming false expenses, with a shady accountant. If HMRC does decide to give a call, he might have to pay n times the money he has saved till now. And my suggestion is always ask your accountant first. He(she) knows the legal stuff, so he(she) would give you the legally correct options. If you aren't comfortable with him(her), you can always change accountants. holiday pay, sick pay and job security You miss those that is why you are paid at a rate much higher than an employee.  benefit of a limited company  You can arrange your salary to pay no PAYE and take the rest as dividends. You willn't have to pay PAYE on that. Secondly if you have a partner(s), all of you can be paid dividends without paying PAYE(if you don't cross the threshold). Assuming you have registered your activities as partnership and receiving this money as Individual, you need to show this under Schedule OS, 1d [other income]. this will be under the ITR-2 [tab CG-OS] XLS tax preparation utility given by Tax Department. The XLS can be found at https://incometaxindiaefiling.gov.in/portal/individual_huf.do If the funds you are receiving are large [more than say Rs 500,000] then suggest you incorporate a partnership firm or company, there are quite a few exceptions you can claim lowering you tax outgo.  The fact that you are transferring funds to your partners can be an issue incase you get audited. You would need to have sufficient evidence to show that the money paid was for services rendered directly and not your income. It would be easier if you create a partnership or have the client directly pay to them. Again if the sum is small its fine, as the sum becomes large, it would get noticed by the tax authorities. Playing devil's advocate here:  Let's say you pull this off as a hired manager with no/little salary but with a share in profits. You really put in a lot of work and get the place going. What is going to stop them to kick you out after a season and take it over again themselves benefitting from your effort? "This is such a common question here and elsewhere that I will attempt   to write the world's most canonical answer to this question. Hopefully   in the future when someone on answers.onstartups asks how to split up   the ownership of their new company, you can simply point to this   answer. The most important principle: Fairness, and the perception of   fairness, is much more valuable than owning a large stake. Almost   everything that can go wrong in a startup will go wrong, and one of   the biggest things that can go wrong is huge, angry, shouting matches   between the founders as to who worked harder, who owns more, whose   idea was it anyway, etc. That is why I would always rather split a new   company 50-50 with a friend than insist on owning 60% because ""it was   my idea,"" or because ""I was more experienced"" or anything else. Why?   Because if I split the company 60-40, the company is going to fail   when we argue ourselves to death. And if you just say, ""to heck with   it, we can NEVER figure out what the correct split is, so let's just   be pals and go 50-50,"" you'll stay friends and the company will   survive. Thus, I present you with Joel's Totally Fair Method to Divide Up The   Ownership of Any Startup. For simplicity sake, I'm going to start by assuming that you are not   going to raise venture capital and you are not going to have outside   investors. Later, I'll explain how to deal with venture capital, but   for now assume no investors. Also for simplicity sake, let's temporarily assume that the founders   all quit their jobs and start working on the new company full time at   the same time. Later, I'll explain how to deal with founders who do   not start at the same time. Here's the principle. As your company grows, you tend to add people in   ""layers"". The top layer is the first founder or founders. There may be 1, 2, 3,   or more of you, but you all start working about the same time, and you   all take the same risk... quitting your jobs to go work for a new and   unproven company. The second layer is the first real employees. By the time you hire   this layer, you've got cash coming in from somewhere (investors or   customers--doesn't matter). These people didn't take as much risk   because they got a salary from day one, and honestly, they didn't   start the company, they joined it as a job. The third layer are later employees. By the time they joined the   company, it was going pretty well. For many companies, each ""layer"" will be approximately one year long.   By the time your company is big enough to sell to Google or go public   or whatever, you probably have about 6 layers: the founders and   roughly five layers of employees. Each successive layer is larger.   There might be two founders, five early employees in layer 2, 25   employees in layer 3, and 200 employees in layer 4. The later layers   took less risk. OK, now here's how you use that information: The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the   company, split equally among everyone in the layer. Example: Two founders start the company. They each take 2500 shares. There are   5000 shares outstanding, so each founder owns half. They hire four employees in year one. These four employees each take   250 shares. There are 6000 shares outstanding. They hire another 20 employees in year two. Each one takes 50 shares.   They get fewer shares because they took less risk, and they get 50   shares because we're giving each layer 1000 shares to divide up. By the time the company has six layers, you have given out 10,000   shares. Each founder ends up owning 25%. Each employee layer owns 10%   collectively. The earliest employees who took the most risk own the   most shares. Make sense? You don't have to follow this exact formula but the basic   idea is that you set up ""stripes"" of seniority, where the top stripe   took the most risk and the bottom stripe took the least, and each   ""stripe"" shares an equal number of shares, which magically gives   employees more shares for joining early. A slightly different way to use the stripes is for seniority. Your top   stripe is the founders, below that you reserve a whole stripe for the   fancy CEO that you recruited who insisted on owning 10%, the stripe   below that is for the early employees and also the top managers, etc.   However you organize the stripes, it should be simple and clear and   easy to understand and not prone to arguments. Now that we have a fair system set out, there is one important   principle. You must have vesting. Preferably 4 or 5 years. Nobody   earns their shares until they've stayed with the company for a year. A   good vesting schedule is 25% in the first year, 2% each additional   month. Otherwise your co-founder is going to quit after three weeks   and show up, 7 years later, claiming he owns 25% of the company. It   never makes sense to give anyone equity without vesting. This is an   extremely common mistake and it's terrible when it happens. You have   these companies where 3 cofounders have been working day and night for   five years, and then you discover there's some jerk that quit after   two weeks and he still thinks he owns 25% of the company for his two   weeks of work. Now, let me clear up some little things that often complicate the   picture. What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the   answer is simple: the investment just dilutes everyone. Using the example from above... we're two founders, we gave ourselves   2500 shares each, so we each own 50%, and now we go to a VC and he   offers to give us a million dollars in exchange for 1/3rd of the   company. 1/3rd of the company is 2500 shares. So you make another 2500 shares   and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's   all there is to it. What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money   saved up, so she decides to go without a salary for a while, while the   other founder, who needs the money, takes a salary. It is tempting   just to give the founder who went without pay more shares to make up   for it. The trouble is that you can never figure out the right amount   of shares to give. This is just going to cause conflicts. Don't   resolve these problems with shares. Instead, just keep a ledger of how   much you paid each of the founders, and if someone goes without   salary, give them an IOU. Later, when you have money, you'll pay them   back in cash. In a few years when the money comes rolling in, or even   after the first VC investment, you can pay back each founder so that   each founder has taken exactly the same amount of salary from the   company. Shouldn't I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to   pay someone in equity for an idea. If one of you had the idea but you   both quit your jobs and started working at the same time, you should   both get the same amount of equity. Working on the company is what   causes value, not thinking up some crazy invention in the shower. What if one of the founders doesn't work full time on the company? Then they're not a founder. In my book nobody who is not working full   time counts as a founder. Anyone who holds on to their day job gets a   salary or IOUs, but not equity. If they hang onto that day job until   the VC puts in funding and then comes to work for the company full   time, they didn't take nearly as much risk and they deserve to receive   equity along with the first layer of employees. What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in   cash or IOUs, not shares. Figure out the right price for that computer   they brought with them, or their clever word-processing patent, and   give them an IOU to be paid off when you're doing well. Trying to buy   things with equity at this early stage just creates inequality,   arguments, and unfairness. How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end   up owning more than 50%, the founders are going to feel like   sharecroppers and lose motivation, so good investors don't get greedy   that way. If the company can bootstrap without investors, the founders   and employees might end up owning 100% of the company. Interestingly   enough, the pressure is pretty strong to keep things balanced between   investors and founders/employees; an old rule of thumb was that at IPO   time (when you had hired all the employees and raised as much money as   you were going to raise) the investors would have 50% and the   founders/employees would have 50%, but with hot Internet companies in   2011, investors may end up owning a lot less than 50%. Conclusion There is no one-size-fits-all solution to this problem, but anything   you can do to make it simple, transparent, straightforward, and,   above-all, fair, will make your company much more likely to be   successful. The above awesome answer came from the Stack Exchange beta site for startups, which has now closed. I expect that this equity distribution question (which is strongly tied to personal finance) will come up more times in the future so I have copied the content originally posted.  All credit for this excellent answer is due to Joel Spolsky, a moderator for the Startups SE beta site, and co-founder of Stack Exchange." You need to clarify with Bob what your agreement is. If you and Bob are working together on these jobs as partners, you should get a written partnership agreement done by a lawyer who works with software industry entity formation. You can legally be considered a partnership if you are operating a business together, even if there is nothing in writing. The partnership will have its own tax return, and you each will be allocated 50% of the profits/losses (if that's what you agree to). This amount will be reported on your own individual 1040 as self-employment income. Since you have now lost all the expense deductions you would have taken on your Schedule C, and any home office deduction, it's a good idea to put language in the partnership agreement stating that the partnership will reimburse partners for their out-of-pocket expenses. If Bob is just hiring you as a contractor, you give him your SSN, and he issues you a 1099, like any other client. This should be a situation where you invoice him for the amount you are charging. Same thing with Joe - figure out if you're hiring him as an independent contractor, or if you have a partnership. Either way, you will owe income and self-employment tax on your profits. In the case of a partnership, the amount will be on the K-1 from the partnership return. For an independent contractor who's operating as a sole proprietor, you report the income you invoiced for and received, and deduct your expenses, including independent contractors that you hired, on your Schedule C. Talk to your tax guy about quarterly estimated payments. If you don't have a tax guy, go get one. Find somebody people in your city working in your industry recommend. A good tax person will save you more money than they cost. IRS Circular 230 Notice: Please note that any tax advice contained in this communication is not intended to be used, and cannot be used, by anyone to avoid penalties that may be imposed under federal tax law. It's wrong in several situations:  One, the business owner counts this as a business expense, which it is not, and therefore reduces the company's profit and taxes. That would be tax avoidance and probably criminal.  Two, someone who is not the sole owner counts this as a business expense, which it is not, reduces the company's profit and when profits are shared, the company pays out less money to the other owners. That's probably fraud.  Third, if the owner or owners of a limited liability company draw out lots of money from the company with the intent that the company should go bankrupt with tons of debt that the owners are not going to pay, while keeping the money they siphoned off for themselves. That would probably bankruptcy fraud.  Apart from being wrong, there is the obvious risk that you lose control over your company's and your own expenses, and might be in for a nasty surprise if the company has to pay out money and there's nothing left. That would be ordinary stupidity. If you have to tell your employees that you can't pay their salaries but offer them to admire your brand new Ferrari, that's something I'd consider deeply unethical. If your friend is paying you same amount as the charge, there should be no problem.  If the friend is paying you an amount in excess of the ticket (or in excess of the club tab in the 2nd example), you need to report the excess amount as income.   I would keep the receipts for the purchases, credit card statements, bank statements, and checks/or electronic receipt show your payment of the credit card.  If the IRS does question these, you tell them what happened and be able to prove that you made no money off the transaction by providing the statements and receipts. A per diem payment is a cost of doing business for the company, not for you. They can claim it (probably); you can't (definitely).