A lot of small enterprises are run by families. If you prepare tax implications for small business clients, you should expect to come across a variety of family enterprises and assist them in navigating the tax ramifications of hiring relatives.
This post will look at one of the most popular family businesses: two spouses working together and how the best professional tax software can help them.
Here is the info to help them handle their taxes correctly, whether they’re business partners or employees—and where to find a professional tax preparers software.
When Married Couples Run the Business Together
When couples run a business together, the way tax implications are handled depends on their business structure and whether they file as a partnership or a qualified joint venture.
Partnership
In most cases, they will be considered partners, even if they have never signed a formal partnership agreement. They should file Form 1065 U.S. instead of Schedule C (Form 1040) and name one spouse as the sole proprietor.
Partnership Income Return Note that partnership revenue is considered “pass-through” income, which means that the partnership will not pay income taxes. Instead, the revenue is distributed to each partner responsible for reporting and paying taxes.
As a partnership, they must follow federal record-keeping rules for partnerships to ensure that each spouse receives the Medicare and Social Security benefits they are entitled to.
However, if they wrongly filed as a sole proprietorship, only one spouse would receive credit for Medicare and Social Security taxes, resulting in substantially lesser Social Security payments for the other spouse when they retire.
Spouses can choose to treat their business as a Qualified Joint Venture rather than a partnership in some situations.
Qualified Joint Venture in Tax Implications
A couple does not need to file as a partnership if they opt to be deemed a qualified joint venture, and both spouses will earn enough Medicare and Social Security tax credits. To be regarded as a qualified joint venture, it must meet the following criteria:
- If you’re looking for a unique way, a married couple who files a joint return is the only member.
- Both spouses have a material stake in the business or trade, and
- Both spouses choose not to be treated as a couple.
- The business must be co-owned and run by spouses rather than a state-law organization (such as a limited partnership or limited liability company).
Both spouses are classified as sole owners for tax purposes in a qualified joint venture, and each must file their Schedule C for their part of the business’s income and losses. The spouses should not utilize the business’s EIN when filing individual taxes.
Instead, each spouse should file under their own Social Security number, with the partnership’s EIN intact. It will only be used to file when the company does not meet the requirements of a qualified joint venture.
When One Spouse Hires The Other
The tax scenarios above apply if the couples are equal company partners, but what if one spouse manages the business and employs the other? The employed spouse will be considered virtually like any other employee for tax reasons.
Their earnings are still subject to income tax and Medicaid/Social Security taxes. The business-owning spouse is still responsible for all payroll taxes, including the employer component of Medicaid and Social Security.
Individuals hired by their spouses have one key tax advantage: their wages are not subject to Federal Unemployment Tax Act (FUTA).
How Do You Know If Your Spouse Is A Partner Or An Employer/Employee?
When spouses work together, the distinctions between a partnership and an employer/employee relationship can become fuzzy. The IRS provides recommendations to assist you and your clients in appropriately determining their duties.
The spouses should be deemed employer and employee if the first spouse primarily controls the firm regarding management choices and the second spouse is under the direction of the first spouse.
Suppose the second spouse has an identical duty in the business’s activities, provides practically equal services to the firm, and contributes capital. The spouses should be considered partners rather than employers/employees for tax purposes.
Conclusion
After reviewing the tax advantages and unique laws that apply to employing family members in your small business, you may conclude that working alongside your kid, spouse, or parent is not only a fantastic way to keep the business in the family but also a great way to reduce your tax burden.
Of course, as with anything tax-related, specific laws, exceptions, and principles apply to every circumstance. As a result, seeking a tax pro software before proceeding is always smart.
For tax preparers, Keystone Tax Solutions offers the best professional tax software to improve accuracy and streamline the process. Request a free demo now!
