I started an LLC last year, and my partner just started her own LLC too.
We are figuring out how to bill each other. Should we bill each other as independent contractors? Or should we swap hours and just bill the difference?
I’m not sure if the second option is legal or beneficial.
I think direct billing would give us more advantages with write-offs and make our records clearer.
Any advice would be great. Thanks and have a nice day!
Swapping hours is considered bartering, and the IRS says bartering transactions are taxable. https://www.irs.gov/taxtopics/tc420
Uma said:
Swapping hours is considered bartering, and the IRS says bartering transactions are taxable. https://www.irs.gov/taxtopics/tc420
Thank you for clarifying that!
What services are you billing each other for?
Remember that LLCs are legal entities, not tax entities. If an LLC has only one owner, the IRS ignores it. Transactions between your LLCs will just be between you and your partner.
@Micah
Thanks for asking!
We’re dealing with labor in gardening and landscaping.
One of us is uneasy about taking a discounted rate, so we agreed to pay each other what we bill the client.
For example, she helps me for 7 hours at $45 per hour and receives the client amount, which is $315. I help her for 5 hours at $50 per hour, so I owe her $250.
We’re both working independently.
If I could ask again, I’d like to know the best way to bill and compensate each other efficiently.
@Micah
It’s true that the IRS disregards single-owner LLCs and treats them as sole proprietorships. But you still need to follow the business formalities like having the LLC collect money, pay bills, and be part of contracts with customers. If you don’t keep your LLC separate, creditors can come after you personally.
Is it okay to trade hours?
No, you have to report all income, including self-employed service income. Not doing so could affect various income-related limitations and phase-outs.
Is it beneficial?
Not really (except for the legal aspect I mentioned). If you charge her $1,000 and she charges you $3,000, you both have $4,000 in deductions. But you must report $1,000 and she has to report $3,000, which cancels out. Shifting income could be favorable or not if one of you has significantly more income, but doing that could also be illegal (you should both be charging market rates).
My assumption is that direct billing would offer the biggest advantages with write-offs and clearer record keeping.
That’s correct except for the write-offs; see the previous comment.
Tate said:
@Kiran
Thanks for your thorough response. This is very helpful.
Considering other comments, it might depend on your relationship and your earnings. Forming a partnership could be a good idea. Do you have an estimate of how much profit you both make each year?
@Kiran
I hope to finish the year with about $10k to $15k in profit. I’m buying my friend’s mowing company (equipment and accounts) either at the end of this year or early 2025. I plan to reinvest as much as I can into equipment and infrastructure while handling the mortgage and groceries.
I’m not sure what she’s predicting, but I guess her profit will be higher because her expenses are lower.
I appreciate the partnership suggestion, but I value our relationship more than any money, so I’m hesitant to change that.
I’ll think it over. Any resources you suggest for partnership structures and their benefits?
Thanks again for all the help.
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@Kiran
Just to clarify, balancing the hours worked and only paying the difference is legal. This is called bartering, and there’s nothing wrong with it.
But just because cash doesn’t change hands doesn’t mean it’s tax-free. All income must be reported, including both cash and bartering income.
Corey said:
@Kiran
You definitely should look at the numbers as long as the labor is reasonable.
What’s the point? Unless their situations are very different, it probably wouldn’t change the overall tax significantly.
@Kiran
A dollar saved is a dollar earned… and even better because savings aren’t taxed, but earned income is.
I take it you aren’t married? If you are, this probably doesn’t matter. You’d report income on your Schedule C and have expenses on theirs, or vice versa, which would balance out in the end. No extra benefit or tax.
Otherwise, yes, you should report all income and expenses on both tax returns. It’s unlikely to be beneficial if your profits are similar.
@Dane
Thanks! This seems to be the general agreement.
We aren’t married and are operating and filing independently.
I appreciate your input and will make sure to report everything correctly.