Form 1099-Misc or Nominee Distribution

[Kirk]

I have a new client who delivers newspaper bundles that are printed locally to carriers in two separate townships. She does this together with her parents and brother. The contract with the newspaper company is in her name, but in reality her family does this together and then splits the profits. The previous preparer just put all income and expenses on her Schedule C, but because only one of the vehicles used is registered to her, the income and expenses will now have to be correctly divided up between each respective family member. When I reviewed her previously filed returns, I saw that the former preparer transferred a specified amount of income from her Schedule C to her parents, showing it as a "Nominee Distribution" under other expenses. My question is this, wouldn't the correct way to transfer this income to her parents be by issuing them a 1099 -Misc. showing this amount? In my mind a "Nominee Distribution" is used for jointly held accounts or property, but because she is only receiving the income as an agent for her family, could you possibly show the transfer of income this way? Sorry for the long-winded post, and thank you so much for your time and help with this!

[kathyc2]

I agree the issuance of a 1099-Misc to family member would be the correct way to go. In essence the paper is contracting with client and she is subcontracting the work out.

[Roland Slugg]

This sounds like something that can be treated in three or four different ways depending, for practical reasons, on the amount of money involved.

You said her parents and brother help with the business. Is this a high school girl? If so, is the amount of gross proceeds she receives from the publisher a fairly small amount? If so, I think the way it's been handled is fine, although I wouldn't describe the payments to her family members as "nominee distributions." I'd call them sub-contractor fees, or delivery costs, or whatever other label describes them properly. Whether or not she should file forms 1099-MISC for the amounts paid to the others depends on the annual, per person totals of those payments. I believe the threshold is $600 per payee.

She could also just do nothing. Report everything on her own tax return, via Schedule C, then reduce the payments made to mom, dad and bro by a portion of the taxes she pays of the family's little JV.

The group could also decide to treat the activity as a partnership and report everything on a p'ship return, allocating the net income between the four individuals. This would mean the preparation and filing of a p'ship return and schedules K-1 for everyone. If the business really is a p'ship, this would probably be the technically correct way to go. But if the $$$ are small, I wouldn't recommend they go to all that trouble (and expense), opting for one of the other, simpler ways, instead. As long as the net income ends up getting reported on one or more people's tax returns, and in approximately the correct amounts, the IRS isn't going to care.

[Kirk]

Form 1099-Misc or Nominee Distribution

Thank you for both responses. The family is made up of 2 adult children, with their parents at retirement age. In reviewing the previous years returns, all income and expenses were included on the daughters Schedule C. Unfortunately, because only one of the four vehicles that are used for deliveries are registered in the daughters name, this will not work going forward. I agree that this arrangement should correctly be organized and filed as a Family Partnership, but for this year we will issue the other family members 1099 forms with their share of income.

[Burke]

. My question is this, wouldn't the correct way to transfer this income to her parents be by issuing them a 1099 -Misc. showing this amount? In my mind a "Nominee Distribution" is used for jointly held accounts or property, but because she is only receiving the income as an agent for her family, could you possibly show the transfer of income this way?

Your intuition is correct. You don't show "Nominee Distribution" of earnings as a miscellaneous expense. You would issue a 1099MISC, and list it under Contract Labor, Line 11 on a Sche C, for those persons who were paid for actual services rendered. Then those persons would account for it on their tax returns, including any expenses they personally incurred. PS: it would be illegal to deduct expenses in this manner if the persons to whom it is paid don't actually perform any duties. And while it is not required to issue a 1099MISC for less than $600, I would do it anyway if the expense is going to be deducted.