A friend of mine and I have recently taken on a part time consulting gig. The job involves building custom software, and we've agreed to work 16 hours a week on the project. The contract was made using my friend's existing LLC. When we are paid, the check will be made out to the existing LLC and deposited in said LLC's checking account. This should hopefully all seem pretty straightforward.
My question is, as a non partner of the LLC, what is the best option for paying out wages. Does it make sense to reconfigure the LLC to make me a partner? Does it matter? As a partner, would I be considered an 'employee' of the LLC, or still just a contractor (for tax purposes). Or should the LLC just cut me a check and that's that?
I was hoping someone else might have run into this same situation and was wondering what the best course of action might be. Are there any good resources out there to read up on? I'm a bit of a novice when it comes to business incorporation, independent contracting and the whole shebang.
Thanks for your help!
Being an employee (W2) of the LLC will be very expensive (the LLC will have to pay payroll taxes, workers' compensation insurance, and file payroll tax forms forever and ever), and I don't see how it will be beneficial to your partner (it might be for you). Subcontracting is an option that I would suggest considering as well. If liability is an issue - you can shield yourself with your own LLC.
Becoming a partner of the LLC is a problem because its an existing LLC that is probably doing other business that has nothing to do with you. It will also require additional tax reporting (form 1065) that single-member LLCs are not required to do.
I don't know what a business attorney will tell you, but you would definitely need a tax consultation with a CPA/EA licensed in your state.
Based on this very limited information, the easiest is for you to be a subcontractor to the the LLC -- it would cut you a check, which you would then pay self-employment and income taxes on. Then, you'd get a 1099 form at the end of the year.
Becoming a member in the LLC is possible, but it's a pain in the butt because the LLC's tax status would change (from a disregarded entity to a partnership). Further, you (or your friend) may not actually want you to be a member of the LLC -- what happens if the LLC's next job has nothing to do with you.
Bringing the whole thing to a business attorney for a 30-minute consult would be a good use of your time.