How to pay a small-biz collaborator
June 10, 2021 7:05 PM Subscribe
Two artists doing a collaboration. Help me figure out taxes!
I run a small art business. A colleague of mine (we know each other through Instagram but have never met in person), let’s call her Annie, also runs a small art business. We just completed a collaboration, in which she created jewelry pieces based off my artwork.
Her guidelines are that we split profits 50/50. She creates samples of the pieces, I put up pre-order listings in my online shop (via Shopify), we both promote online, I photograph the items and list them, I take pre-orders, she creates the pieces within about 4 weeks, ships them all to me, then I package and fulfill orders. We had a similar collection last year (items were sold though my then-Etsy shop) where I ended up paying taxes on that Etsy income, because I didn’t account for sending her her half of sales.
Here we are now, and I’n ready to send Annie her half of the sales ASAP (about $3.5K). I told her I’d find out if I needed to eventually send her a form 1099, and she replied and asked if I could take taxes out now, and that she’s always considered this kind of thing to be a large wholesale order.
I’m feeling silly for not figuring this out with her earlier. Can anyone advise on what the best move here is? I want to do my taxes correctly and I thought a 1099 was the correct form for her but now I’m confused. Thanks for any help!
I run a small art business. A colleague of mine (we know each other through Instagram but have never met in person), let’s call her Annie, also runs a small art business. We just completed a collaboration, in which she created jewelry pieces based off my artwork.
Her guidelines are that we split profits 50/50. She creates samples of the pieces, I put up pre-order listings in my online shop (via Shopify), we both promote online, I photograph the items and list them, I take pre-orders, she creates the pieces within about 4 weeks, ships them all to me, then I package and fulfill orders. We had a similar collection last year (items were sold though my then-Etsy shop) where I ended up paying taxes on that Etsy income, because I didn’t account for sending her her half of sales.
Here we are now, and I’n ready to send Annie her half of the sales ASAP (about $3.5K). I told her I’d find out if I needed to eventually send her a form 1099, and she replied and asked if I could take taxes out now, and that she’s always considered this kind of thing to be a large wholesale order.
I’m feeling silly for not figuring this out with her earlier. Can anyone advise on what the best move here is? I want to do my taxes correctly and I thought a 1099 was the correct form for her but now I’m confused. Thanks for any help!
I am Not An Accountant; I am a person who has spent years combining various full or part time W2 employment with freelance 1099 work (albeit providing services and not material objects.)
Can anyone advise on what the best move here is?
The best move is for the two of you to pay for a few hours of an accountant's time to advise you (Zoom meetings & emails), not only on what to do now but on the best way to proceed in the future. (For example, it might be best for both of you to create an entirely new business entity as partners for these collaborations.)
Having said that . . .
I thought a 1099 was the correct form
Yes, this seems right to me - IRS.gov: Am I required to file a form 1099?
Which suggests to me:
she replied and asked if I could take taxes out now
I mean, no? Because you don't know what her tax liability would be. If she's running an independent jewelry-making business with just her, she should be filling out Schedule C - Profit or loss from business (Sole Proprietorship), which means she could and should be accounting for things like the cost of the raw materials and tools, and rent on studio space (or writing off the cost of using part of her living space for the business), and milage on her vehicle, and costs to promote the jewelry she's selling to you or others, and all sorts of other stuff. All of which will affect how much profit she makes in the business and therefore how much she should be paying in taxes. And on top of that as a self-employed small business owner she's responsible for a percent of Social Security taxes (that would ordinarily be paid by an employer), and filing out Schedule SE, which, again, depends on how much she actually makes as profit (and therefore personal income) from her business. The money you are paying her is business income, not wages.
Those taxes that get "taken out" have to, y'know, eventually get paid to the IRS and (depending) various state and city tax agencies, and who is legally responsible for that and how would that actually happen? Again, she's not an employee of yours, it's not on you to do this work, AFAIK.
that she’s always considered this kind of thing to be a large wholesale order.
Not only do I not really see how this is relevant to "taking out taxes" (what does "wholesale" have to do with anything?), but if anything it's evidence that you (and I) are correct - she is a separate business entity fulfilling a contracted order for goods and services. She is responsible for figuring out and filing and paying her own taxes. (Like, I know a guy who runs a small machine shop and does work for major auto & truck manufacturers - his business is a "wholesale" provider for parts, the big companies don't have anything to do with his taxes, they just pay him for the work and final products, he has to figure and file his own taxes as a small business.)
Now, I will say this is a place where an accountant's input would be a really good idea. I work for a very small business that has both full-time W2 employees and uses a lot of 1099 independent contractors. I believe that at one point a previous office manager/accountant figured out a way to withhold at least estimated taxes for our 1099 contractors and pay it. So there might be a way to do this, and an accountant would know how. (I don't.)
BUT.
1) We are a fully legitimate small business, with a Federal Tax ID number and a state business license and we make quarterly payments & filings and have the whole thing in place to have multiple W2 full time employees with the benefits and Federal and State and city withholding and payments and filing and yada yada yada. So it might not have been a big deal to make the 1099 wihtholding happen. If your art business is just you as sole proprietor selling stuff online & filling out your own Schedule C, trying to withhold & pay your contractors' taxes may be far more work than is practical.
And 2) while our 1099 contractors don't work every week, when they do work they tend to send invoices weekly or bi-weekly. So there may have been a legal or practical element wherein holding back a little bit of taxes every so often is OK, trying to do this with a big chunk of money is not.
TL:DR - 1) you two need to get together and get an actual accountant to weigh in, 2) IME & O, the 1099 is correct and there is little or no practical and/or legal ability for you to "take taxes out". and 3) there might be a way for you to do some kind of withholding and paying taxes in the future but for this round at least I think she's on her own.
(Oh yeah, and none of this touches on the question of state sales taxes, if that's part of what she's talking about, which is a whole other can of worms and beats the hell out of me. Definitely accountant up if that's part of the issue.)
posted by soundguy99 at 5:56 AM on June 11, 2021 [2 favorites]
Can anyone advise on what the best move here is?
The best move is for the two of you to pay for a few hours of an accountant's time to advise you (Zoom meetings & emails), not only on what to do now but on the best way to proceed in the future. (For example, it might be best for both of you to create an entirely new business entity as partners for these collaborations.)
Having said that . . .
I thought a 1099 was the correct form
Yes, this seems right to me - IRS.gov: Am I required to file a form 1099?
"If, as part of your trade or business, you made any of the following types of payments, use the link to be directed to information on filing the appropriate information return.She's not an employee of yours, you don't set her schedule and tell her what to do; you have a trade/business, she has another entirely separate trade/business (thus, she (or her company) is an independent contractor), you have contracted with her business to provide jewelry making services, these are the payments you owe her from the sale of that jewelry.
Payments, in the course of your trade or business: (1099-MISC) (Note: It is important that you place the payment in the proper box on the form. Refer to the instructions for more information.)
Services performed by independent contractors or others (not employees of your business) (Box 7)
Which suggests to me:
she replied and asked if I could take taxes out now
I mean, no? Because you don't know what her tax liability would be. If she's running an independent jewelry-making business with just her, she should be filling out Schedule C - Profit or loss from business (Sole Proprietorship), which means she could and should be accounting for things like the cost of the raw materials and tools, and rent on studio space (or writing off the cost of using part of her living space for the business), and milage on her vehicle, and costs to promote the jewelry she's selling to you or others, and all sorts of other stuff. All of which will affect how much profit she makes in the business and therefore how much she should be paying in taxes. And on top of that as a self-employed small business owner she's responsible for a percent of Social Security taxes (that would ordinarily be paid by an employer), and filing out Schedule SE, which, again, depends on how much she actually makes as profit (and therefore personal income) from her business. The money you are paying her is business income, not wages.
Those taxes that get "taken out" have to, y'know, eventually get paid to the IRS and (depending) various state and city tax agencies, and who is legally responsible for that and how would that actually happen? Again, she's not an employee of yours, it's not on you to do this work, AFAIK.
that she’s always considered this kind of thing to be a large wholesale order.
Not only do I not really see how this is relevant to "taking out taxes" (what does "wholesale" have to do with anything?), but if anything it's evidence that you (and I) are correct - she is a separate business entity fulfilling a contracted order for goods and services. She is responsible for figuring out and filing and paying her own taxes. (Like, I know a guy who runs a small machine shop and does work for major auto & truck manufacturers - his business is a "wholesale" provider for parts, the big companies don't have anything to do with his taxes, they just pay him for the work and final products, he has to figure and file his own taxes as a small business.)
Now, I will say this is a place where an accountant's input would be a really good idea. I work for a very small business that has both full-time W2 employees and uses a lot of 1099 independent contractors. I believe that at one point a previous office manager/accountant figured out a way to withhold at least estimated taxes for our 1099 contractors and pay it. So there might be a way to do this, and an accountant would know how. (I don't.)
BUT.
1) We are a fully legitimate small business, with a Federal Tax ID number and a state business license and we make quarterly payments & filings and have the whole thing in place to have multiple W2 full time employees with the benefits and Federal and State and city withholding and payments and filing and yada yada yada. So it might not have been a big deal to make the 1099 wihtholding happen. If your art business is just you as sole proprietor selling stuff online & filling out your own Schedule C, trying to withhold & pay your contractors' taxes may be far more work than is practical.
And 2) while our 1099 contractors don't work every week, when they do work they tend to send invoices weekly or bi-weekly. So there may have been a legal or practical element wherein holding back a little bit of taxes every so often is OK, trying to do this with a big chunk of money is not.
TL:DR - 1) you two need to get together and get an actual accountant to weigh in, 2) IME & O, the 1099 is correct and there is little or no practical and/or legal ability for you to "take taxes out". and 3) there might be a way for you to do some kind of withholding and paying taxes in the future but for this round at least I think she's on her own.
(Oh yeah, and none of this touches on the question of state sales taxes, if that's part of what she's talking about, which is a whole other can of worms and beats the hell out of me. Definitely accountant up if that's part of the issue.)
posted by soundguy99 at 5:56 AM on June 11, 2021 [2 favorites]
It is your account the sales are being tracked on. However if you had a "shared" bank account that wasnt in one name or the other (business name or EIN, perhaps?) Just for the transactions you share then your income would be deposits × months ÷ 2. Or as taxes go, business income over $400 x .9235 x 0.062 = business tax (formula is not exactly this but close). Aftrr that you can deduct her tax portion from your gross earning then pay 1/2 your taxes with hers.
posted by The_imp_inimpossible at 8:42 AM on June 12, 2021
posted by The_imp_inimpossible at 8:42 AM on June 12, 2021
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posted by parmanparman at 12:44 AM on June 11, 2021