Contributed by: TriciaD, FreeTaxUSA Agent
If you run a self-employed business, family members might work for you, this could include your spouse. Your spouse might even co-own the business with you.
If you jointly own and operate a business with your spouse, the business is considered a partnership unless both spouses qualify and elect to have the business treated as a qualified joint venture (QJV).
Depending on the scenario, the treatment of income tax, FICA (Social Security and Medicare) withholdings, and FUTA tax (Federal Unemployment Tax) differ. If you co-own your business FUTA tax can be split with a QJV election.
Is my spouse an employee or co-owner?
Employee: Your spouse is considered an employee if you make all the business decisions and manage or direct your spouse’s job duties. In this case, your spouse is subject to income tax and FICA (Social Security and Medicare) withholding, but not to FUTA tax. Typically, FUTA tax (Federal Unemployment Tax) is reported and paid by employers.
Co-owner: If your spouse has an equal say in day-to-day decisions and management, provides services, and contributes capital to the business, the IRS considers the business a partnership, and Form 1065 (Partnership Tax Return) should be filed. However, an election for the business to be treated as a qualified joint venture can be made.
Note: If your spouse is an independent contractor performing services for clients outside of an employer relationship, they must file a separate Schedule C exclusively for their contract work. Income and expenses should be kept separate from the co-owned business activities.
What is a qualified joint venture and what are the requirements?
If you and your spouse file a joint tax return you may have the option to form a qualified joint venture (QJV). A QJV is when spouses co-own a business, and each spouse is regarded as an individual sole proprietor.
For the business to be considered a QJV the following conditions must be met:
- You file a joint tax return.
- Both of you actively participate in the trade or business.
- You co-own the business.
- The business is not formed under state law as a partnership or limited liability company (LLC).
If both of you opt for QJV status, separate Schedule C or Schedule F (farming income) forms should be filed to show your individual shares of gain, loss, deductions, and credits. Individual Schedule SE (Self Employment) forms should also be included based on income reported on each Schedule C or Schedule F.
What are the pros and cons of electing qualified joint venture?
Pros:
- Filing is simpler. Rather than filing as a partnership with K-1 forms or Form 1065, each of you will file as a sole proprietor.
- Both of you pay SE taxes which ensures fair Social Security benefits for each. If only one spouse contributes, the other's retirement benefits could be affected. A joint venture helps you both receive your entitled benefits.
- An EIN is generally not necessary; your SSN’s can be used instead.
Note: An EIN is necessary if the sole proprietorship is required to file excise, employment, alcohol, tobacco, or firearms returns. The spouse filing those returns should complete Form SS-4 to request an EIN as a sole proprietor.
Cons:
Since a sole proprietorship isn't separate from its owner, both of you will be personally liable for business actions. Unlike LLCs or corporations, you may need to use personal assets to cover business debts.
Sole proprietorships, including QJVs, also tend to incur higher taxes, especially self-employment taxes.
How do I elect qualified joint venture?
To elect QJV status:
- File a joint tax return (1040 or 1040-SR).
- Divide all income, gain, loss, deduction, and credit according to your portion of interest in the business.
- Include separate Schedule C or Schedule F forms with the tax return.
- Include separate Schedule SE forms, if required.
The QJV election technically remains in effect as long as the required qualifications are met. If your business no longer meets the qualifications, it automatically becomes a partnership. If you choose to change from a QJV to a partnership later on, the change requires IRS approval.
What to do if the business was formerly a partnership?
If your business was a partnership and both partners have an EIN, you cannot use either for the QJV. One EIN stays with the partnership in the event QJV criteria aren't met or revoked. Instead, each spouse must use their SSN, as QJV treats both as sole proprietors who usually don't need an EIN.
A sole proprietorship may need an EIN if your business employs staff or you file forms that require an EIN. Either spouse can handle employment taxes using their sole proprietor EIN. If Forms 941 were filed or taxes were paid under the partnership's EIN, one spouse could be viewed as the "successor employer" for Social Security and federal unemployment limits.
Conclusion
If you and your spouse co-own a business, it is important to evaluate and compare business classification options to decide which will be more beneficial for your taxes. Understanding the differences between a qualified joint venture and other business entities like partnerships or sole proprietorships can offer considerable tax benefits and simplify your filing process. Thoughtful planning will ensure you make the best choice for your specific circumstances.
Self-employment tax: What is it? - FreeTaxUSA Community
