An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. Previously, married individuals in a business together were considered partners and required to file an annual Form 1065, as well as Form 1040.
For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for federal tax purposes.
A qualified joint venture conducts a trade or business where:
- the only members of the joint venture are a husband and wife who file a joint return
- both spouses materially participate in the trade or business (mere joint ownership of property is not enough)
- both spouses elect not to be treated as a partnership, and
- the business is co-owned by both spouses (and not in the name of a state law entity, such as a partnership or LLC)
The QJV option simplifies the filing requirements by allowing husband and wife businesses to be treated as sole proprietorships and file a Form 1040 federal tax return rather than partnerships for tax purposes. It eliminates filing a Form 1065 tax return for qualified joint ventures. The option also helps to ensure each spouse gets proper Social Security credit.
Spouses electing qualified joint venture status are treated as sole proprietors for federal tax purposes. An Employer Identification Number (EIN) is not required for a sole proprietorship unless the sole proprietorship is required to file excise, employment, alcohol, tobacco, or firearms returns when using the rules for sole proprietors. If the spouses previously had an EIN for their partnership, that EIN can only be used if the spouses do not elect qualified joint venture status.
Making the election to be treated as a qualified joint venture
Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit of Loss From Farming, and, if otherwise required, a separate Schedule SE (Form 1040), Self-Employment Tax.
To make the qualified joint venture election for 2009, jointly file your 2009 Form 1040, with the required schedules. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based, provided neither spouse exceeds the Social Security tax limitation.
Earning Social Security benefits
For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes under the provision, in accordance with their respective interests in the venture.
A spouse is considered an employee if there is an employer/employee type of relationship. (i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.) If such a relationship exists, then the second spouse is an employee subject to income tax and FICA, Social Security and Medicare withholding.
If your spouse is your employee, and not your partner, you must pay Social Security and Medicare taxes for him or her. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.
Reporting Federal income tax as a qualified joint venture including self-employment tax
Spouses electing qualified joint venture status are treated as sole proprietors for federal tax purposes. The spouses must share the income, gain, loss, deduction, and credit of the business.
If the business has employees, either of the sole proprietor spouses may report and pay the employment taxes due on wages paid to the employees, using the EIN of that spouse’s sole proprietorship. If the business already filed Forms 941 or deposited or paid taxes for part of the year under the partnership’s EIN, the spouse may be considered the “successor employer” of the employee for purposes of determining whether the wages have reached the social security and Federal unemployment wage base limits.
For more information on this topic, please contact Attorney Persad at 407-647-7887 or email him at attorneypersad@cplspa.com.