Tax issues when operating a business as a married couple
Operating one’s own business offers the advantage of employing family members, but it’s important to understand the specific employment tax requirements that apply to family employees, which can differ from those for other employees.
Here are key considerations outlined by the IRS when operating a business as a married couple:
- Spouse as an Employee:
- A spouse is considered an employee if there exists an employer/employee relationship. For instance, if one spouse substantially controls the business in terms of management decisions and the other spouse works under their direction and control, the second spouse is an employee. Income tax and FICA (Social Security and Medicare) withholding apply in this case.
- If both spouses have equal authority in the business, contribute substantially equal services, and provide capital, a partnership relationship exists. In such partnerships, business income is reported on Form 1065, U.S. Return of Partnership Income.
- Both Spouses Carrying on the Business: Qualified Joint Ventures:
- The IRS allows married couples filing joint tax returns to operate a qualified joint venture without it being treated as a partnership for federal tax purposes, provided certain conditions are met:
- Both spouses must materially participate in the business.
- Both spouses must elect for this provision to apply.
- The business must be co-owned by both spouses and not held under a state law entity like a partnership or LLC.
- Income, gain, loss, deduction, and credit from the business are divided between the spouses according to their respective interests in the venture. Each spouse reports their share on the appropriate form (e.g., Schedule C).
- The IRS allows married couples filing joint tax returns to operate a qualified joint venture without it being treated as a partnership for federal tax purposes, provided certain conditions are met:
- One Spouse Employed by Another:
- If one spouse works as an employee for the other spouse’s trade or business, the wages are subject to income tax withholding, Social Security, and Medicare taxes. However, they are not subject to FUTA (Federal Unemployment Tax Act) tax.
For more information on how to employ a spouse in a business venture while ensuring compliance with IRS regulations, please contact a ShindelRock tax professional.