The ability to hire family members is a huge perk of operating your own business. There are issues to consider when operating a husband and wife business. For instance, there are special employment tax requirements for family members.
How Spouses Earn Social Security Benefits. A spouse is considered an employee if there is an employer/employee relationships, such as the first spouse controlling the business and the second spouse being under the direction and control of the first spouse. In such a relationship, the second spouse is subject to income tax and FICA (Social Security and Medicare) withholding.
In a relationship where the second spouse has an equal say in the control of the business in terms of management decisions, provides substantially equal services to the business and contributes capital to the business, then they are considered to be in a partnership type relationship. In a partnership type relationship, the business’s income should be reported on Form 1065, U.S. Return of Partnership Income.
Qualified Joint Venture. A qualified joint venture whose only members are a husband and wife who both materially participate in the trade or business and are filing a joint return can elect not to be treated as a partnership for Federal tax purposes. If elected, all items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse will take into account his or her respective share of these items as a sole proprietor and file a separate Schedule C. Each spouse’s share is also taken in to account the same way in determining net earnings from self-employment. The benefit of this is that it generally gives each spouse credit for social security earnings on which retirement benefits are based. An exception of this is if either spouse exceeds the social security tax limitation. For further information about self-employment taxes, please refer to the StrataTax article “Understanding the Self-Employment Tax”.
One Spouse Employed by Another. You must pay Social Security and Medicare taxes for your spouse if he or she is your employee, not your partner. His or her wages are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tas.
Your tax preparer can provide you with more information regarding the treatment of a husband and wife business on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.
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