Paying yourself for work on a flip?

Question

I’m looking to do a flip soon and I’m going to do a good amount of the work myself. I have an established handyman business and a separate REI LLC. I would like to account for the labor I will be putting in. So my question is this, is there a way for my LLC to hire and pay my Handyman business? Is this legal? Are there tax benefits to this strategy? My original goal of the handyman business was to supplement my REI projects

Eamonn McElroy · Answer

@James Theron Erwin III

A sole proprietorship and a single-member LLC taxed as a 'disregarded entity' and owned by an individual are one and the same.  Tax theory dictates that a sole proprietor that has two trades or business cannot pay himself (and therefore expense) a fee.

High level, you're just moving money from one pocket to another.  It's not income (or deduction).

If a corporate tax election (S Corp or C Corp) is made, the answer can change.  Ask your tax pro for details.

Matt W. · Answer

Hi all, figured I'd chime in because I am in a similar situation with James and so many CPAs are on this thread; my question is can I pay my handyman business for repairs and maintenance that I do on my properties.  I understand that this is probably a zero sum idea, since $1 paid to my handyman business is $1 less of passive income from the investing side, but maybe I'm missing something.

What might make more sense is if I pay myself for work done as a result of damages to the property out of the security deposit.  I work for many other investors in town, so I don't see why this would be a problem or illegal, and in this case it actually is income.

I know it's apples to oranges, but I worked for GE for many years and they had something like 80 different entities that always contracted with and charged each other for various project, not to mention an army of accountants and lawyers.

Thanks!

Ashish Acharya · Answer

The way you pay yourself from LLC or sole proprietor is just withdraw money from business accounts.

You need to book that as distribution in your LLC/ sole books.

You will eventually pay tax on the earning not the distribution as distribution is earning that is already taxed.

Entity planning should also be considered. Two things:

1) You will eventually benefit from electing S -Corp for your flipping entity to save SE taxes when you will start making more money.

2) General, right now,  your contracting company would not benefit from electing S Corp as most of the service company where primary revenue driver is a sole shareholder would not benefit from S elections. And you are only transferring the income that is not subject to SE tax to another entity that does the same. Also, you might wanna not incorporate the contracting company if you ever want hire your kids for tax planning as well.

Don't over complicate things now, make sure you make profit at first flip.

Steve Vaughan · Answer

Both are just jobs.  You'll be paying yourself sooner by drawing a salary from one job to take from another.  Where's the pea now? LOL

When you are ok leaving your sweat as equity in a property that drips passive income to you over years and years, you will be an investor.  I encourage you to get to that place.

Linda Weygant · Answer

You cannot be a W2 employee of your own sole proprietorship or single member LLC.  You may see some tax savings (depending on your profit levels) if you formed an LLC and then did an S-Corp election, but I don't know enough about your situation to say for sure.

Taxes aren't cookie cutter, so your scenario and goals may be vastly different to somebody else doing similar things.  You may want to consider getting with a knowledgeable tax professional who can help guide you in these topics.

James Theron Erwin III · Answer

@Linda Weygant So basically it sounds like I would be over complicating the process by having one business pay the other? Part of my goal is to also pay myself as an employee for doing the work so I have some income as I go. Should this just be done in the form of a draw? Or should I treat myself as a w2 employee or 1099?

Eric James · Answer

As far as I know your LLC is probably a disregarded entity (by the IRS), so your taxes will be the same either way. I don't know if you have some other reason to do this.

Linda Weygant · Answer

Both businesses (flipping and handyman) are Self Employment income, so it's the same either way from a tax standpoint.

Paying yourself for work on a flip?

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