Hiring a laborer for first rehab-what do I need to do?

Rehabbing & House Flipping
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Hiring a laborer for first rehab-what do I need to do?

David RobertsonBusiness Member
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes

My younger brother will likely be doing some of the general labor around my first rehab project. He is going to likely be using some of his hours towards his internship program at school to graduate. I'm curious, what all needs to be done in order to pay him legitimately in the eyes of the IRS?

Do I need to have a company established? What paperwork does he have to fill out? Do I have to provide him with insurance?

Thanks for your input.

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James Vermillion
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
14y
Originally posted by David Robertson:
Originally posted by James Vermillion:
It sounds like your brother will be acting as a contractor, meaning if you pay him over the IRS limit (I believe it is still $600) you will need to issue a 1099. Whether or not you create a business entity is up to you, you can read hundreds of threads on BP about the pros and cons of entities, how to form them, etc.

As a contractor you do not have to provide him with insurance (they typically insure themselves).

Do I need to file a 1099 form for each contractor that I have on-site or just for independent contractors/individuals? Do I only do this when I file my taxes for 2012? How do you track all of your expenses?

Thanks.

If you use a general contractor you will only need to worry about a 1099 for that person, but if you use separate subs you will need to file a 1099 for each of them (that is paid over $600 in the year). I track everything in QuickBooks which allows me to print a 1099 report at the end of the year to see who I need to issue one to.

I have all people who do any work for me fill out a W-9 (Request for Taxpayer Identification and Certification) prior to starting any work. I file this information so I have what I need when I issue the 1099s (at the end of the year).

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  • James Vermillion
    Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
    14y

    It sounds like your brother will be acting as a contractor, meaning if you pay him over the IRS limit (I believe it is still $600) you will need to issue a 1099. Whether or not you create a business entity is up to you, you can read hundreds of threads on BP about the pros and cons of entities, how to form them, etc.

    As a contractor you do not have to provide him with insurance (they typically insure themselves).

    0Reply
  • Terry Portier
    Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
    14y

    I’ve been contemplating this one too and talked to a local RE attorney last week. His advice of course is I take the conservative approach and create an entity. He wants a $3500 retainer @ $300/hr to cover the state work, answer my questions, look over sales contracts, etc. Way I see it as a start up business, and I have done this once before, is most of that I can handle myself and as I gain assets I’ll form an entity. Yes I realize there is more risk there but less start-up cost. Right now all I’m looking for is a release of liability for my contractor’s to sign. I think I need that since although they are insured the insurance company’s can still go after me if they can prove negligence on my part. Other thing I may try and do is leverage off them by mechanic liens.

    As far as the IRS, since a new entity has no income and my personal is much more, it would be more beneficial for me write off on a Schedule C.

    Anyone know where I can these types of forms for my state online?

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  • James Vermillion
    Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
    14y

    I would be very cautious about paying an attorney a bunch of money to setup an entity (and I am typically very cautious about these things). Look into the process in your state...I was able to set mine up myself very easily. If you are going to pay an attorney speak with several, I would imagine this would be something that pricing would vary quite a bit on.

    1Reply
  • David RobertsonBusiness Member
    OP
    Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
    14y
    Originally posted by James Vermillion:
    It sounds like your brother will be acting as a contractor, meaning if you pay him over the IRS limit (I believe it is still $600) you will need to issue a 1099. Whether or not you create a business entity is up to you, you can read hundreds of threads on BP about the pros and cons of entities, how to form them, etc.

    As a contractor you do not have to provide him with insurance (they typically insure themselves).

    Do I need to file a 1099 form for each contractor that I have on-site or just for independent contractors/individuals? Do I only do this when I file my taxes for 2012? How do you track all of your expenses?

    Thanks.

    FlipperForce
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  • James Vermillion
    Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
    14y
    Originally posted by David Robertson:
    Originally posted by James Vermillion:
    It sounds like your brother will be acting as a contractor, meaning if you pay him over the IRS limit (I believe it is still $600) you will need to issue a 1099. Whether or not you create a business entity is up to you, you can read hundreds of threads on BP about the pros and cons of entities, how to form them, etc.

    As a contractor you do not have to provide him with insurance (they typically insure themselves).

    Do I need to file a 1099 form for each contractor that I have on-site or just for independent contractors/individuals? Do I only do this when I file my taxes for 2012? How do you track all of your expenses?

    Thanks.

    If you use a general contractor you will only need to worry about a 1099 for that person, but if you use separate subs you will need to file a 1099 for each of them (that is paid over $600 in the year). I track everything in QuickBooks which allows me to print a 1099 report at the end of the year to see who I need to issue one to.

    I have all people who do any work for me fill out a W-9 (Request for Taxpayer Identification and Certification) prior to starting any work. I file this information so I have what I need when I issue the 1099s (at the end of the year).

    2Reply
  • James Vermillion
    Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
    14y

    This link might help as well:

    http://www.irs.gov/businesses/small/article/0,,id=179114,00.html

    1Reply
  • Chris Calabrese
    Residential Real Estate Agent · Mt. Pleasant, SC · Member since 2010 · 257 posts · 130 votes
    14y

    I would agree with James that paying an attorney to form a basic entity is unnecessary, especially at that price. In my state, it only costs about $100 to form a LLC and the application is 2 pages. If you are the only owner, you can form a single member LLC, which is very simple.

    Make sure to collect W-9's from any contractors. You can pay your accountant to file 1099's at the end of the year, or I use a website called www.filetaxes.com that will send 1099's for about $5 each.

    0Reply
  • Geri Johnson
    Investor · CA · Member since 2011 · 20 posts · 6 votes
    14y

    Your first time you want to keep it simple. You can do your taxes in Turbo Tax or some similar entity next year. If you are using day laborers to dig ditches, landscape, clean, etc. just use a bunch of different ones so that you don't pay any one person more than $600.

    For laborers that you pay more than $600 then you will need to file a 1099 when you do taxes (Turbo Tax or Quick Books can do the 1099s), but you need their SSN and other information (W9).
    If you are paying a company, such as ABC Glass Company, or XYZ Window Company then you do not have to do anything for taxes. You only have to 1099 independent workers who do not have a legal company entity.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    14y

    David Robertson If he's working as a general laborer, you have to pay taxes, unemployment, etc. just as you would for any other employee. Some of the laws for this varies from state to state. Here, in California, we have the State Board of Equalization, I'm not sure what Missouri has. Also, you may be required to have liability insurance, etc. Check to see if the work he's doing is considered that as a "handyman" , because some states require licensing for that too. You can probably google alot of this and get answers. Below is link for Kansas City Dept. of Labor, it will answer most your questions. Some states have exceptions on family members.

    http://www.dol.ks.gov/

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  • David RobertsonBusiness Member
    OP
    Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
    14y

    Should I have the independent workers sign a waiver to limit my liability if one of them gets injured?

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Geri Johnson:
    ... you need their SSN and other information (W9).
    If you are paying a company, such as ABC Glass Company, or XYZ Window Company then you do not have to do anything for taxes. You only have to 1099 independent workers who do not have a legal company entity.

    Some incorrect info in that quote. Get the W9 completed - a company should use the Tax ID rather than SSN. A company does get a 1099, unless it is incorporated; any LLC should be issued a 1099.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by David Robertson:
    Should I have the independent workers sign a waiver to limit my liability if one of them gets injured?

    First determine whether they are somebody's employee or not; if an employee of somebody, then that somebody will need to have liability coverage AND workmen's comp coverage to be considered "fully insured".

    If not an employee, but a sole proprietor, then you still want them to have liability coverage. But most sole proprietors won't have workmen's comp coverage, so in those cases you would want to get them to sign a waiver in the event they are hurt on your job.

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  • Rob Gillespie
    Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
    14y

    Keep it simple, It is his job to carry his own insurance as an independent contractor. Just give him a 1099 at the end of the year. The bigger problem here is hiring family! LOL!

    0Reply
  • Ryan Tam
    Real Estate Investor · Lake Forest, IL · Member since 2012 · 10 posts · 3 votes
    14y

    It depends on how close you two are. My dad helped me out on remodeling my home for free and I gave him a nice gift at the end of it. You are allowed to give family gifts tax free. No need to involve the IRS if it's only family members giving each other gifts.

    But if you want a business trail, then yea, just give him a 1099 and let his accountant/TurboTax deal with it. No need for you to have a separate tax entity for this. You probably would need that LLC if only you want to do quick flips and avoid the capital gain tax. If you hold it for a period, there is no big problem there either. Taxes for long term investments are about same as regular income tax (depending on your bracket). Check with your account for details.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Ryan Tam,

    Welcome to the board. I'll send you a PM.

    Yes you can give family a gift of up to 13k tax free each year. Anything over that a gift tax return will be required.

    Once you are in the business of flipping homes you will be paying tax at your ordinary rate. An LLC will not have any effect on that unless you are operating as a C-Corp.

    As a C-Corp, you will pay corporate tax and then capital gain rates on your dividends.

    Capital gain rates are dependent upon your tax bracket. The only way it will qualify as capital gains is if it is your personal residence or you are not in the business of flipping homes.

    -Steven the Tax Guy

    Your guide to IRS laws, rules and regulations.

    [email protected]224-381-2660
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