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A business associate of mine owns 100% of an LLC (this LLC has insignificant income and valuation). He is offering me 10% ownership of this company in addition to paying me a fixed monthly stipend for my work as a software engineer (this constitutes about 10-20 hours of work a month). The contract he wants me to sign states I'll receive my monthly stipend (if that is the right word) as a 1099 contractor. When the company starts generating enough revenue he'll stop the 1099 status and we'll each take proportional drawings from the company account instead (so the company will have a net profit of $0.00 each year).

It strikes me as being a bit strange: being a 1099 contractor for a company I part own.

I also know that 1099 income means I'll have to pay not only my marginal tax rate of 28%, but also FICA taxes, giving me an effective tax rate of almost 45%, that's a large chunk of "my" income claimed by the IRS (frustrating, as I already have a W-2 job where my employer also pays FICA taxes; I note that I am currently below the Social Security tax limit, even with the extra 1099 income). But under what tax conditions are the drawings made then?

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The contract he wants me to sign states I'll receive my monthly stipend (if that is the right word) as a 1099 contractor.

The right word is guaranteed payment, which is what "salary" is called when a partner is working for a partnership she's a partner in. Which is exactly the case in your situation.

1099 is not the right form to report this, the partnership (LLC in your case) should be using the Schedule K-1 for that.

I suggest you talk to a lawyer and a tax adviser (EA/CPA) who are licensed in your State, before you sign anything.

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    Perfect answer. Just want to point out to those who don't know - one of the benefits of using guaranteed payments is the owner gets to deduct half of the FICA taxes as a business expense. – TTT Jan 5 '16 at 16:35

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