My brother-in-law owns a small business. He lacked some cash flow and I gave him $120,000 in Jan 1, 2007. He considered me as an investor and I have been receiving a dividend ($2,500) each month as per an official special legal agreement. A few days ago, I was surprised to hear him saying that I should expect 1099-MIS to file next year. Now he considers me as an independent contractor. I never did any work for him or anything at all. I need some advice people. Is this a legal tactic on his part? Why is doing this now? How can I challenge him? What are my rights and obligations? What tax form should I really file in this case? Please help! Thank you so much.
2007-10-20 04:02:16 · 7 answers · asked by Mr. J 4 in Business & Finance ➔ Taxes ➔ United States
This sound like he is doing something shifty that improves his tax situation while hurting you. In other words, paying you back less than what you gave him.
He is giving you a dividend. This should be taxed at a 15% rate for you as an investor. If he gives you payments as a contractor, you will have to pay SE taxes (15.3%) plus regular taxes.
He gets to deduct the payments to you as an expense from him income. Dividends are not deductible.
I would challenge him on this. Make sure that he gives you a 1099 DIV instead
2007-10-20 04:18:33 · answer #1 · answered by nystom 2 · 2⤊ 0⤋
You invested $120,000. Are you an owner of the business, or what? It doesn't sound like it was written up as a loan. Who drew up the "official special legal agreement." I bet it was not your attorney.
You must go to an attorney and have him review this document and explain it to you. If you are receiving dividends, then they may or may not be taxed to you at 15% as mentioned in other answers. It would depend on whether these are qualified dividends. It may be that the money you are receiving is going to be taxed as ordinary income to you.
If the company had no profits then there would not be dividends. Something tells me that this is the case. It appears that your brother-in-law is now trying to figure out how to label the money he paid you. If he wants to renegotiate the terms of the agreement, you need legal help.
If you did not actively participate in the business you should not be paying self-employment taxes and you should not be issued a document that forces you to file self-employment taxes.
Get some independent legal advice and educate yourself about the agreement you have with this business. Then you will know how to file your taxes and what you will owe.
2007-10-20 13:48:13 · answer #2 · answered by ninasgramma 7 · 0⤊ 0⤋
No, it isn't a dividend, it's a loan repayment. Weird that he's doing it that way - maybe he thinks that way he can deduct the amount on HIS tax. Tell him to talk to his accountant and fix this or you'll talk to the IRS - that might get him to clean up his act.
I'm assuming that this "dividend" is his loan repayment. If it's additional to the loan repayment, then the divident would be taxable income to you, but you'd get a 1099-div not -mis. Is it possible he's just confused on the various 1099 versions?
I hope that you have written documentation of the loan - sounds like you do. You were very generous to lend him that money, and now he's trying to mess with you, and make you pay taxes on the payback - payments for a loan are not taxable income, except for any part of the payment that is interest. If he's really just planning to show any interest payments on the 1099 then he's doing it correctly, but it would be a 1099-int not -mis. You will have to pay tax on any interest you receive, but not on the repayment of the principal.
If he persists, I would turn him in to the IRS although I realize that family situations can be tough. The better way would be to head this off by telling him to talk to his accountant so you don't have to tell the IRS what he's trying to pull. This is
ridiculous.
Good luck.
2007-10-20 11:42:08 · answer #3 · answered by Judy 7 · 1⤊ 0⤋
On the surface it sounds like he is attempting take advantage of you. But before you start a war over this issue you should have someone review the "official special legal agreement" and determine how repayment of this "loan" should be treated by you and your brother-in-law. Once you know how this arrangement should function you can clarify those items for which there seems to be some confusion on his part. You should address this issue with him before January when 1099 forms of some sort may just be sent to the IRS.
2007-10-20 12:05:34 · answer #4 · answered by ? 6 · 0⤊ 0⤋
No you are not being deceived.
What advantage will your brother in law get by giving you 1099-MISC instead of 1099-DIV? For both the payments, he will have deductions. So what can be the legal tactic on his part.
Then another questions: Can a small business (probably sole proprietor) give dividends?
Also the dividend income is reported by an individual on schedule B of form 1040 along with interest income. So it is same as getting interest payment. It will be ordinary income for you and you will pay taxes on the income. I think that this is what you want instead of getting an income subject to employment taxes of 15.3%.
So it is better for you to discuss with your brother in law, what is the best way to make the payment. You certainly don't want 1099-MISC.
2007-10-20 22:26:23 · answer #5 · answered by MukatA 6 · 0⤊ 2⤋
The answer should lie in what is says in the "official special legal agreement"
It could be a return of capital
2007-10-20 11:31:25 · answer #6 · answered by Anonymous · 0⤊ 0⤋
What portion of the $2,500 is interest? You should only be paying on the interest that you received with your monthly $2,500 payments.
2007-10-21 16:26:51 · answer #7 · answered by Gary 5 · 0⤊ 1⤋