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February 24, 2023
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I have a small business where I sell antiques on the side. I do this with 2 other family members. Can I claim what I pay the three of us as a business expense?

  • February 24, 2023
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Best answer by Opus 17

If three people participate in the business together, you need to have a serious discussion about income taxes and business structure.  This all assumes you are not a corporation or multi-member LLC, if you are, then ignore everything else and write back, you may need a CPA.

 

If you are an unstructured business, you basically have 3 options.

1. Single owner with employees.  There is one single owner (maybe you).  All income and expenses are reported on one Schedule C.  Anyone who helps with the business is an employee.  You pay wages, deduct taxes, and issue a W-2 at the end of the year.

 

2. Single owner with subcontractors.  There is one single owner (maybe you).  All income and expenses are reported on one Schedule C.  Other people who materially participate in the business is treated as a subcontractor or independent contractor.  They receive money, and they are issued a 1099-NEC.  They report themselves as self-employed contractors and file schedule C on their tax returns, but they don't have business expenses of their own, just the money they are paid for helping out.

 

3. Three owners (partnership).  The business files a form 1065 Partnership Tax Return to report all the income and expenses of the partnership.  Pass-through income and expenses are reported on K-1 statements issued to each partner that come out of preparing the 1065.  Each partner lists the K-1 on their tax return instead of including a schedule C.

 

Note that the partnership 1065 is due March 15, not April 15 (unless you get an extension) and the late fees are substantial.  Form 1065 can only be prepared using Turbotax Business, this is a separate program from Home&Business or Self-Employed and is only available to install on a PC, there is no Mac or Online version.  

2 replies

SantinoD
February 24, 2023

It depends on how your business is structured. If they are considered employees, you have to pay them wages that are subject to Payroll taxes and reported to them on Form W-2. Or if you are working together to share profits and expenses, you can each report your portion of profit and expenses as self-employment income on each of your tax returns.

 

If your family members are not considered employees, you can pay them as independent contractors. You would have to file 1099-NEC for the family member that you paid $600 (total for the year)or more. But even if you didn't pay $600 you can still deduct the amount you paid them as a business expense. This would be considered a "contract labor" expense. 

 

You mentioned in your question "three of us". If you are including yourself, you cannot take a deduction for yourself. It sounds like you are a sole proprietor, the self-employment income you receive is considered gross income. If you withdraw money for yourself, this is not considered a deduction because once income is received, it's already considered gross income whether you withdraw it or not.

 

Here is some info on how to determine if your family members are considered employees: Independent Contractor (Self-Employed) or Employee?

Opus 17Answer
Employee
February 24, 2023

If three people participate in the business together, you need to have a serious discussion about income taxes and business structure.  This all assumes you are not a corporation or multi-member LLC, if you are, then ignore everything else and write back, you may need a CPA.

 

If you are an unstructured business, you basically have 3 options.

1. Single owner with employees.  There is one single owner (maybe you).  All income and expenses are reported on one Schedule C.  Anyone who helps with the business is an employee.  You pay wages, deduct taxes, and issue a W-2 at the end of the year.

 

2. Single owner with subcontractors.  There is one single owner (maybe you).  All income and expenses are reported on one Schedule C.  Other people who materially participate in the business is treated as a subcontractor or independent contractor.  They receive money, and they are issued a 1099-NEC.  They report themselves as self-employed contractors and file schedule C on their tax returns, but they don't have business expenses of their own, just the money they are paid for helping out.

 

3. Three owners (partnership).  The business files a form 1065 Partnership Tax Return to report all the income and expenses of the partnership.  Pass-through income and expenses are reported on K-1 statements issued to each partner that come out of preparing the 1065.  Each partner lists the K-1 on their tax return instead of including a schedule C.

 

Note that the partnership 1065 is due March 15, not April 15 (unless you get an extension) and the late fees are substantial.  Form 1065 can only be prepared using Turbotax Business, this is a separate program from Home&Business or Self-Employed and is only available to install on a PC, there is no Mac or Online version.