Partners or Members in Business as a Contractor

by | May 29, 2022

When more than one person forms a business they are defaulted to be taxed as a partnership. This could be members of an LLC or partners in a partnership. At year end, the business would file a 1065 return for the business and issue K-1s to the members or partners. However, can the members or partners also be issued a 1099?

There are many reasons individuals come together to form a business. One may have the financing while the other has the skills. The one with the skills and doing the actual work might want to get paid first for their time and effort. The first thing to note is that this member or partner cannot be an employee under Revenue Ruling 69-184. However, the member or partner can be an independent contractor for the LLC or partnership.

To be paid as a contractor, this must be based on the actual labor and work done. This could be an hourly or project basis. However it is divided up, there should be an independent contractor agreement with the business and partner. This would be different from guaranteed payment agreements.

Guaranteed payments would be included on the K-1. A Guaranteed Payment, under IRC Section 707 (c), is defined as a payment that is: (1) made to the partner acting in the capacity as a partner in exchange for services performed for the partnership or for the use of capital by the partnership and (2) not dependent on partnership income. So the question comes down to, if they are acting in their role as a partner or if they are acting outside their role of a partner. To make this separation clear, the partner doing the labor may want to consider forming another business to contract with the partnership.

If you have a specific question on how payments between members or partners should be structured or how they are treated for tax purposes, give Wildes at Law a call and we can help you sort through the complexity.

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