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Partnership or employee?

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i live in Indiana. Nine months ago I purchased a business with the help of a another person. The person at the time helped with the down payment and has continued working in the business doing repairs. Now the other person wants their investment back and only wants to be classified for tax purposes as an employee. In all essense I will and have been a self proprietor. The other person was paid wages for their work. At the time of purchase both names were put on the loan and now I am refinancing so it will only be in my name. When I file taxes can I file them as a self proprietor showing the other person as an employee of mine? All they did was help me get started. I know that they have to show their money as an investment. That part they will take care of. In a way I guess it was like a loan and then they cosigned to help?



Employee not partner

You are correct, you can show the other person’s money as a loan made to you, and you can file tax as a sole proprietor, and the other person as an employee. However, if you paid wages, then you were liable for withholding and reporting of wages. Download IRS Publication 15, Employer’s Tax Guide at http://www.irs.ustreas.gov/forms_pubs/index.html.

Also, go to the following for info about withholding for Indiana purpoases: http://www.in.gov/dor/publications/notices/00pdf/dn01_0700.pdf


You need to make sure you have filed all of the appropriate payroll tax forms for the months, quarters and years that you had your employee. The consequences for failure to file on a federal level and on a state level can be severe from a financial standpoint as well as a personal liability standpoint.

May I ask why would you want to operate as a sole-prop? This does not allow for any protection from a liability standpoint for your personal assets and the tax consequences on your personal return (1040 Schedule C) are horrible from a self-employment tax issue.

My advice: find an attorney to set up your corporation...they will file with the Secretary of State, write your by-laws, articles of incorporation and issue stock certificate(s)...next find a CPA to file your Subchapter S election with the Internal Revenue Service...this will save you many dollars in self-employment tax...there is a downside, however,...you have to reorganize your thinking from a sole-prop...you must now keep your corporation completely separate from your personal (ie. separate checking accounts, separate invoicing etc.)

If you have questions, I'm in Indianapolis, IN at 317.841.3393...

Gregory L. Nowling, CPA
Comer, Nowling And Associates, P.C.


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