How do I handle taxes correctly with the following scenario...?

Question

I own an LLC and will be paying various people for their services. The people I will be paying are just random people and do not belong to any corporation. For example, they make me something, I say I like it, I give them some money, and we both go our separate ways. What do I have to do in order to handle taxes the right way? Thanks in advance for the help.

Answer 1

If someone makes something, and then you buy it if you like it, you are buying a product.  If you are buying it to re-sell, then it is cost of inventory.  If it's something you need in the operation of your business, and you're not re-selling it, then you can deduct it as a business expense - under "supplies", if it's stuff your go through fairly quickly, and you depreciate under "assets" if it's something large and long-lasting.

If you are paying someone for their labor - then that is paying for services.

From your description (the fact that you pay them for the widget, not for their labor, and if you don't like it you don't buy it), it sounds like you're buying a product, not paying for labor.

Answer 2

if they are independent contractors and not your employees you keep track of every payment then 1099 (self employment income) them at the end of the year. make sure you get their federal id number or social security number, you will need that for the 1099. they will be responsible for reporting the income and paying the taxes associated with it.

Answer 3

If you pay some one for products or services pay them as a 1099 independant contractor and they are responsible for paying thier taxes.  At the end of the year mail them a W-2 and The Irs a W-2 if the amount they were paid is over $500.