How do multiple people accept payment for work, without one person being "bank"?

Question

I'm in a group of freelancers, we've not formed a company. We've been offered a paying job, which we'll work on together to complete. The work will be paid for in advance, in the form of a retainer. Typically when working alone, I would just accept the payment and file a 1099 for the client at tax time.

In this situation, it seems like one person would have to accept the retainer payment, then act as "bank" to distribute the funds when each person does work on the project. My understanding is that the person acting as "bank" might be on the hook for the taxes of the entire retainer (especially if there is still money in the retainer at the end of the year), since according the the client's taxes, the individual is the one that was paid, not each person in the group.

Is the "bank" individual on the hook for the taxes? If so, how can we best avoid that? (without requiring the client to act as bank, or make multiple payments to each of us).

If it matters, this particular client is from outside the United States, but we'd like this problem solved for domestic clients as well.

I'm looking for something similar to this answer but for multiple people.

Answer 1

The issues are larger than taxes. If one of you receives the check, then breaks off 25% of it for themselves and sends three checks out to each of you that will be indicated on that person's taxes. You three will then all recognize your portion of the income on your taxes and it's all settled. It's no big deal, it's a bit rag-tag but it'll get the job done. I've done little ad-hoc partnership work with people this way and it's not a problem.

This is why you should really be more formal. What if this entity contracting you guys sues you? Who has the liability, if only one of you was paid? What if the money is sent to one of you and that person dies before paying you? What if you all get another client? What if this contracting entity has another project?

The partnership needs to have the liability. The partnership needs to receive the money. The partnership needs to be named on whatever contract you all sign. The partnership can be a straight partnership, or maybe the four of you take a 25% stake in an LLC or Inc arrangement.

Minimally, you should sit down with your partners so everyone knows everyone else's responsibilities, and you should write it all down. It probably sounds like overkill, and I'm sure your partners are you buddies and "we're tight and nothing bad could come between us." I've done some partnership work with more than one friend, we've always been fine. Some ventures are successful, some aren't; I'm still very good friends with all of them. Writing things down manages expectations and when money starts moving around, everyone is happier when everyone has a solid expectation of who gets what.