Employee of a Business

Employee of a Business
question

My mother is setting up a sole proprietorship business. Mom wants my sister and I to do work for her. Within a few months we will get a share of the earnings in lieu of a paycheck. For every $100 earned it will be divided between 4 people. how will this work with taxes. is it considered payroll and how does the business list it. Mom is considering us partners. Is this a dividend? I just bought a house and don't want to loose it by not recording income properly.

answer

There are a host of issues to address. First, your mother should consult an attorney and determine what type of entity should be formed to own and operate the business. Limited liability companies ("LLCs") are commonly used (but state law and other factors may affect this). If your concern is loosing your house (and it should be) having a properly formed and operated entity is the key to protecting the personal assets of all owners. As for tax withholding, take the step above first. Once the entity type is determined then you have to determine the relationship each person will have with the entity. You and the others could be employees, consultants, or owners. If you are owners you can draw a salary and/or distribution (dividend if the entity is a C or S corporation, S Corporation distribution if an S corporation, partnership distribution or guaranteed payment to a partner if a partnership, etc.). You really need to consult with an accountant, but your business lawyer can help with the structuring of the entity and relationship which must be addressed. If you organize as an LLC the issue as to whether earnings are subject to payroll tax or not is a bit complicated. Many of the laws pertaining to this are based on partnership rules which don't quite apply in the LLC context. The biggest decision is who is to own equity and who should not. If more than your mother is an equity owner it is very important to have a detailed agreement governing your relationship.

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