Reconcile 1099-MISC within a partnership

[das8]

We are a group of about 5 people in a partnership. We complete work as Independent Contractors in an online Marketplace. We also perform some work outside of the Marketplace.

Employers hire ICs through the Marketplace. The Employers will issue a 1099-MISC to each individual who earns more than $600 per year, and optionally issue one below $600. The Marketplace issues a 1099-K to each IC.

The Marketplace requires a SSN for each IC.

Three out of 5 ("high-stakes") of the partners use all 5 Marketplace accounts to complete work. The remaining 2 ("low-stakes") partners use only their own Marketplace accounts. The low-stakes partners complete only around 10% of the work completed on their account. (The remaining 90% is completed by the high-stakes partners.) However, Employers send a 1099-MISC to these low-stakes partners for the full 100%.

In the past all five partners have joined incomes on a 1065 return. Then the partnership redistributes the income accordingly. The partnership issues a Schedule K-1 to each partner. All income is reported and taxed. However, an Employer's 1099-MISC does not match the low-stakes partners' income as reported.

Is there any way to reconcile this?

[das8]

Okay, so elsewhere there is mention of "Nominee/middleman returns." Specifically http://www.irs.gov/pub/irs-pdf/i1099gi.pdf.


Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You must also furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the Internal Revenue Service Center for your area. On each new Form 1099, list yourself as the “payer” and the other owner as the
“recipient.” On Form 1096, list yourself as the “Filer.” A spouse is not required to file a nominee return to show amounts owned by the other spouse. The nominee, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.

This is essentially how we filed last year but without actually following the guidelines. So persons 4/5 will file the income on Schedule C. Then file 1096 and 1099-MISC for owners 1/2/3. The reduce their income on Schedule C by the amount passed to the nominees.

[vangogh]

Welcome to the forum das8. I'm not entirely sure I'm following the problem. If I'm understanding correctly, the problem is that one of your low-stakes partner received a 1099 in some amount, but that amount is less than the person earns under the partnership, so how to you reconcile the difference going back to the partnership? Is that right?

My first thought is if I was that partner, I'd leave because clearly I could make more on my own than in the partnership.

As far as reconciling the numbers, the nominee recipient seems to cover it. Are you thinking you need something different? It's a new form to me, but based on the quote you pulled it sounds like it's exactly what you want to do.

[das8]

Welcome to the forum das8. I'm not entirely sure I'm following the problem. If I'm understanding correctly, the problem is that one of your low-stakes partner received a 1099 in some amount, but that amount is less than the person earns under the partnership, so how to you reconcile the difference going back to the partnership? Is that right?

My first thought is if I was that partner, I'd leave because clearly I could make more on my own than in the partnership.

As far as reconciling the numbers, the nominee recipient seems to cover it. Are you thinking you need something different? It's a new form to me, but based on the quote you pulled it sounds like it's exactly what you want to do.

Thanks :)

It is complicated but the low stakes partner only completes around 10% of the work completed on their account. So the other 90% is income that they are receiving through a 1099-MISC but not generally working for. The low stakes partner is probably as interested in working for the partnership as the Marketplace's Employers.

Anyway, it is a win-win for all parties involved... (except maybe the R&D department of the Marketplace who, because others like us must be working around the issue, is not tasked with finding a solution for these cases, and so is getting less work these days ;))

Yes accounting the income to a nominee sounds the best. Maybe a question is whether the IRS will wonder about such a high percent being sent through? I.e. 90/10? And on a regular basis? It is not huge sums but certainly appreciable, enough to warrant a 1099-MISC from Employers.

One other question comes to mind, actually. Some of the Employers do not always send a 1099-MISC. This is sometimes because an IC does not receive above $600 per year. In this case does the low stakes partner still pass a 1099-MISC to the other high stakes partners for the income? Or do the high stakes partners just claim the income outright?

[Freelancier]

And you think getting an accountant to help you the partnership -- paid for by the partnership -- with your taxes is a bad idea... why? For less than $400 you can probably get this all cleared up and have someone legally bonded for their answer instead of us people out here on a free forum who are not liable for making a mistake.

[das8]

And you think getting an accountant to help you the partnership -- paid for by the partnership -- with your taxes is a bad idea... why? For less than $400 you can probably get this all cleared up and have someone legally bonded for their answer instead of us people out here on a free forum who are not liable for making a mistake.

On the flip side sometimes you've got extra time to burn. If that is the case then why not spend some off-time trying to figure out some of the questions on your own? In any case the partnership is on a cusp of making not enough to care too much.

[tallen]

One other question comes to mind, actually. Some of the Employers do not always send a 1099-MISC. This is sometimes because an IC does not receive above $600 per year. In this case does the low stakes partner still pass a 1099-MISC to the other high stakes partners for the income? Or do the high stakes partners just claim the income outright?

If the cumulative amount passed from the nominee to one of the other partners over the course of the year, not on a per job basis, but cumulative, exceeds $600, then yes a 1099 is called for. There is nothing that says you can't issue 1099's for amounts less than $600, you just don't have to. (ETA - actually that last part, I'm not sure of -- it may be that the IRS just doesn't want to be bothered, hard to imagine as that may be.)

[das8]

If the cumulative amount passed from the nominee to one of the other partners over the course of the year, not on a per job basis, but cumulative, exceeds $600, then yes a 1099 is called for. There is nothing that says you can't issue 1099's for amounts less than $600, you just don't have to. (ETA - actually that last part, I'm not sure of -- it may be that the IRS just doesn't want to be bothered, hard to imagine as that may be.)

Excellent. Thanks for the info!

[das8]

BTW, thanks so much for your replies. It has been really helpful to us!

After looking over the 1099-MISC we have just a few questions. We are having some trouble finding the information on the Internet. We are assuming that the 1099-MISC received from Employers has income labeled in Box 7, "Nonemployee compensation," for Independent Contractors.

1) Does the low-stakes (1) partner pass the income in Box 7 to the other high-stakes (3) partners? Or is there a Box for passing money through as Nominee/Middleman? Is a nominee payment registered anywhere as "Nonemployee compensation"?

2)

"Self-employment tax. Generally, amounts reportable in box 7 are subject to self-employment tax. If payments to individuals are not subject to this tax and are not reportable elsewhere on Form 1099-MISC, report the payments in box 3. However, report section 530 (of the Revenue Act of 1978) worker payments in box 7."
... We assume that only the nominee will be paying self-employment tax on the portion nominated to them. The remainder is paid by the low-stakes partner, and there is no double-taxation. Is this correct?

3) For EIN/Parntership...

Recipient's Identification Number
Enter the recipient's identification number using hyphens in the proper format. SSNs, ITINs, and ATINs should be in the XXX-XX-XXXX format. EINs should be in the XX-XXXXXXX format. You should make every effort to insure that you have the correct type of number reported in the correct format.

...Four scenarios:
A) Low-stakes partner is on 1065 return. The partner provides each high-stakes partner with a 1099-MISC.
B) Low-stakes partner is on 1065 return. The partner provides just one 1099-MISC to the partnership using partnership's EIN.
C) Low-stakes partner is not on 1065 return. The partner provides each high-stakes partner with a 1099-MISC.
D) Low-stakes partner is not on 1065 return. The partner provides 1099-MISC to just the partnership using partnership's EIN.

We are pretty flexible regarding the above scenarios. Is any method preferable to the others?

[tallen]

How is your partnership agreement structured? In other words, how is revenue generated by the partnership (i.e., amounts paid to the EIN) supposed to be distributed to the partners? Are the low-stakes partners part of the partnership, or not?

[das8]

How is your partnership agreement structured? In other words, how is revenue generated by the partnership (i.e., amounts paid to the EIN) supposed to be distributed to the partners? Are the low-stakes partners part of the partnership, or not?

The low-stakes partners are part of the partnership. Partners have an account which generates income which is passed to the partners who generated the income. (There are probably just two scenarios from above, A and B.) So for example low-stakes partner 4 passes 85% of their account's income to high-stakes partners 1-3, since the high-stakes partners 1-3 generated say 90% of the account's income (leaving ~5% for the low-stakes partner, as well as 10% generated by partner 4), and the 1-3 partners then split the 85% three ways. In general low-stakes partners may also receive some income from the partnership even when the partnership is not using their account to generate income. This is because low-stakes partners take time to stay in touch with the business, continue to support the partnership by offering use of their account, etc.

[tallen]

So in scenario B, if the low-stakes partner transfers money to the partnership (EIN), then that money would have to be distributed according to the partnership agreement; in scenario A, the money could be distributed to the partners in whatever proportions are appropriate, which might not be the same as what is dictated by the partnership agreement.

In answer to your other questions:

(1) what box to check on the 1099-misc -- I would assume non-employee compensation unless one of the other categories seems more fitting (but I don't have the instructions for that form in front of me right now).

(2) The low-stakes partner who transfers the nominated funds to others would not pay any tax on the transferred funds, rather the final recipient(s) of the funds would pay those taxes. All of the 1099 income to a partner could be considered as business revenue for that persons business, but the amount transferred would be considered a business expense (to the person who originally received the funds), and they only pay self-employment tax on their net business profits.

Disclaimer: I am just some guy on the internet, not a tax accountant or tax attorney....

[Freelancier]

Disclaimer: I am just some guy on the internet, not a tax accountant or tax attorney....That's my concern with this whole thread: It's detailed tax accounting recommendations that really should be done by a CPA instead of some guy on an internet. Not that @tallen is wrong, I have no idea, but neither does the OP and the OP is about to fill out Federal tax forms and forward this same information to his partners based on this discussion. I just don't understand why people don't just go get a CPA and spend $200-$400 once it gets so complicated that they feel they need to go out on a free forum to get tax advice.

[das8]

So in scenario B, if the low-stakes partner transfers money to the partnership (EIN), then that money would have to be distributed according to the partnership agreement; in scenario A, the money could be distributed to the partners in whatever proportions are appropriate, which might not be the same as what is dictated by the partnership agreement.

In answer to your other questions:

(1) what box to check on the 1099-misc -- I would assume non-employee compensation unless one of the other categories seems more fitting (but I don't have the instructions for that form in front of me right now).

(2) The low-stakes partner who transfers the nominated funds to others would not pay any tax on the transferred funds, rather the final recipient(s) of the funds would pay those taxes. All of the 1099 income to a partner could be considered as business revenue for that persons business, but the amount transferred would be considered a business expense (to the person who originally received the funds), and they only pay self-employment tax on their net business profits.

Disclaimer: I am just some guy on the internet, not a tax accountant or tax attorney....

Wow, awesome, thank you so much!


That's my concern with this whole thread: It's detailed tax accounting recommendations that really should be done by a CPA instead of some guy on an internet. Not that @tallen is wrong, I have no idea, but neither does the OP and the OP is about to fill out Federal tax forms and forward this same information to his partners based on this discussion. I just don't understand why people don't just go get a CPA and spend $200-$400 once it gets so complicated that they feel they need to go out on a free forum to get tax advice.

It is just a matter of doing your homework. Dropping off a pile of questions to a CPA, versus hopefully looking for the answer to a single concise question. This in addition to understanding our tax liability, and possible tax liability were things in our business to change in the future, as well as what the CPA may proffer as an explanation or solution. Forums are generally a place where people ask questions and go to learn. This is a forum for taxes within a forum for small business owners, is it not?

This coming from someone taking a small biz. class last year in which the teacher walked the class through filing their own business taxes. Every owner from the class could go out and get someone to file their taxes for a fee each year. The Schedule C students could get free filing on the Internet or in town. Of course then the owners will not know the fine details of their tax standing. That being said the teacher mainly focused on Schedule C filing and only touched briefly on partnerships, LLCs, S corps and so on. And so those of us in the class in those other situations were left to continue their learning outside of class.



Real education is about genuine understanding and the ability to figure things out on your own; not about making sure every 7th grader has memorized all the facts some bureaucrats have put in the 7th grade curriculum.
-Aaron Swartz

It is a great idea to have a law professional review your partnership agreement. And likewise it is also a great idea to have a CPA review your tax documents. For many reasons, nonetheless, there is an argument for people to do their homework beforehand. Sure let's drop it in the lap of a professional, but let's also make an effort to figure it out on our own beforehand.

As a small business owner it feels great to be able to explore and investigate our business options, as well as our tax options.