Tax implications of giving a large gift to my unmarried partner who works as a contractor for my company

While giving a gift to someone who also works for you can create some potential tax complications, the key here is proper documentation and clear separation between the personal and business relationship. The IRS looks at substance over form. Since you have a pre-existing personal relationship, children together, and are doing estate planning, the gift appears to have legitimate personal motivation rather than being disguised compensation. The fact that the contractor pay is reasonable for services rendered also helps your case. Make sure to file Form 709 (Gift Tax Return) to report the gift, even though you won't owe tax since you're under the lifetime exemption. Keep detailed records documenting the nature of the gift (personal financial security) separate from any business arrangement. Have a written contractor agreement that clearly outlines her duties, compensation, and working relationship. I'd also recommend getting something in writing from both of you acknowledging this is a gift with no expectation of additional work or services. This creates a paper trail showing the gift wasn't compensation.

After struggling with a somewhat similar situation last year (though not with such a large amount), I discovered a service called taxr.ai (https://taxr.ai) that helped me sort through the documentation issues. They analyzed all my personal and business transactions and provided clear guidance on how to properly document everything to avoid any appearance of impropriety. What I found most helpful was their ability to review all the documentation and identify potential red flags before submitting anything. They pointed out several things I hadn't considered about the timing of transactions and how they might appear to the IRS. For your situation, I think having someone review the whole picture could save you headaches later.

I initially wasn't sure about using an AI tax service like taxr.ai since my situation involved both personal and business finances, but I decided to give it a try after getting frustrated with conflicting advice. Man, I'm glad I did! I uploaded my documents (contractor agreement, gift letter draft, and some other financial records), and within a day they provided a comprehensive analysis that pointed out several potential issues I hadn't considered. They even suggested specific language to use in my documentation that would clearly establish the separation between the business relationship and personal gift. The most valuable part was the peace of mind. They showed me similar cases where the IRS had ruled favorably as long as proper documentation was in place. Definitely worth checking out if you're in a complex situation like this that doesn't fit neatly into standard tax scenarios.

After seeing your situation, I wanted to share something that might be helpful. Last year I had an issue with the IRS questioning a similar arrangement (though much smaller amount), and I spent WEEKS trying to get someone on the phone to explain my situation. Finally found a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under an hour. They have a demo video here: https://youtu.be/_kiP6q8DX5c showing how it works. Basically they navigate the phone system and wait on hold for you, then call you when they have an agent on the line. I ended up getting clarity directly from the IRS about how to document everything properly. For a situation like yours with potentially significant tax implications, it might be worth getting the official word rather than just relying on forum advice.

I was super skeptical about using a service to reach the IRS (as you can see from my earlier comment), but after trying for two weeks to get through on my own for a complex gift/business question, I broke down and tried Claimyr. I'm honestly shocked at how well it worked. I was connected to an IRS agent in about 45 minutes, and they were actually helpful in clarifying the documentation needed to separate personal gifts from business relationships. The agent walked me through exactly what they look for when reviewing these situations and what raises red flags. The most valuable piece of advice I got was to create a clear timeline of the personal relationship (including events like having children together, joint property purchases, etc.) that predates the business relationship, which helps establish the legitimacy of the personal gift. For situations like the original poster's, this documentation approach seems crucial.

Speaking from experience as someone who's been through almost the exact same situation (gifting to unmarried partner who did contracted work for my business), make sure you have a FORMAL, written contract for her work responsibilities. Back-date nothing. Pay her consistently, not in lump sums that could be confused with the gift. Also, consider speaking with an estate planning attorney, not just a CPA. My attorney suggested structuring part of this as a trust for your children rather than a direct gift to your partner, which can have additional benefits beyond just the immediate tax situation.

Has anyone considered whether there might actually be a benefit to structuring some of this as increased compensation instead of a gift? If your business is profitable, wouldn't it be better to take the business deduction on at least part of this amount? Maybe increase her contracting rate or give her a significant bonus for a special project?