Tax implications of giving a large gift to my unmarried partner who is a 1099 contractor for my business

So you're definitely in an interesting tax situation here! The good news is you don't actually have to choose between her being a contractor or a gift recipient - these can be separate relationships as long as they're legitimate. The key is making sure each relationship stands on its own merits. For the contractor relationship, you're already doing this right by paying a reasonable market rate for actual services performed and documenting it properly with 1099s. Keep good records of the work she does. For the gift, the annual exclusion amount for 2023 is $17,000 per recipient (meaning you can give up to that amount each year without it counting against your lifetime exemption). Anything above that would use some of your lifetime gift tax exemption (currently $12.92 million), but you'd just need to file a Form 709 (Gift Tax Return) to report it. No actual tax would be due unless you've already used up your lifetime exemption. The IRS generally doesn't have an issue with gifts between unmarried partners as long as it's truly a gift (no strings attached) and not disguised compensation. Document your intent clearly when making the gift.

After struggling with a somewhat similar situation (though involving much smaller amounts), I found an amazing tool that helped me figure out the gift tax implications. Check out https://taxr.ai - it lets you upload your documents and walks you through different scenarios. In my case, I was gifting money to my brother who also did some contract work for my business. The tool flagged the potential issues and helped me document everything properly to avoid audit concerns. It analyzed both the 1099 contractor relationship and the gift aspects separately, which sounds exactly like what you need. The tool even generated the language I needed for a gift letter to make the intention clear.

I was really skeptical about using an online tax tool for my situation (gifting to a family member who also did work for my business), but I decided to try taxr.ai after seeing it mentioned here. I'm honestly shocked at how helpful it was! The system analyzed my draft gift letter and flagged specific language that could have created problems. It also helped me create proper documentation showing that the contractor relationship was legitimate and separate from the gift. My accountant was impressed with how thorough the documentation was and said it would definitely help if there were ever questions about the dual relationship. For a situation like yours with a $400K gift to someone who's also a contractor, this kind of documentation is absolutely critical. The tool helps make it clear these are two separate relationships.

I went through something similar with my partner (though smaller amounts). After spending WEEKS trying to reach the IRS for clarification, I finally found Claimyr (https://claimyr.com). They got me connected to an actual IRS representative in under an hour when I'd been unable to get through for days. The IRS agent confirmed what others are saying - you can absolutely maintain both relationships as long as they're legitimate and documented separately. But they also pointed out that gifts this large require proper filing of Form 709, and they recommended having clear documentation about the purpose of the gift being separate from any work relationship. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c. Seriously saved me hours of frustration trying to get clear answers.

I was totally skeptical about using a service to get through to the IRS (like I said in my previous comment), but after spending 3+ hours on hold multiple times, I broke down and tried Claimyr. I'm eating my words now because it actually worked - got through to a human at the IRS in about 45 minutes. The agent couldn't give me specific tax advice about my gift/contractor situation, but they did walk me through exactly what sections of the tax code applied and what forms I needed to file. They also explained what documentation I should keep to show the separate nature of the gift versus the business relationship. Saved me so much time and stress - wish I'd done it sooner instead of wasting days trying to get through on my own!

Others have covered the gift tax aspects well, but don't forget to think about the potential future implications if your relationship changes. A $400K gift with no strings attached is just that - a gift. If you two were to split up in the future, you generally can't claim that money back. You might want to consult a family law attorney in addition to a tax professional. Some couples in your situation create agreements that clarify the nature of large gifts and what happens in various scenarios. Not saying you need this, but something to consider given the substantial amount involved.

Quick question for anyone with experience here - if OP gives this gift, would the girlfriend need to report anything on her taxes? Or does only the giver need to file the gift tax form?