The IRS is advising business owners that certain tax treatments and employment tax rules apply to companies that include family members.
When both spouses run the trade or business together and share in profits and losses, they may be partners, regardless of whether they have a formal partnership agreement.
If so, they should report income or losses from the business on Form 1065.
They should not report the income on Schedule C of the 1040 form in the name of one spouse as a sole proprietor.
But spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.
Under a qualified joint venture, spouses may choose treatment as a joint venture instead of a partnership.
Joint Venture Rules
This applies in cases where:
- The only members are a married couple who file a joint return
- Both spouses materially participate in the trade or business
- Both spouses choose not to be treated as a partnership
Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or LLC, are eligible for the qualified joint venture election.
Spouses choosing qualified joint venture status are sole proprietors for federal tax purposes.
Each spouse must file a separate 1040 Schedule C to report their share of profits and losses.
They don't need an employee identification number unless their sole proprietorship must file excise, employment, alcohol, tobacco, or firearms returns.
One spouse cannot continue to use the partnership’s EIN for the qualified joint venture.
The EIN must stay with the partnership; it’s used by the partnership for any year the business doesn’t meet qualified joint venture requirements.
Here is more information on joint partnerships.
If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes.
The spouse, as an employer, must have an EIN for their sole proprietorship.
If the business filed or paid employment taxes for part of the year under the partnership’s EIN, the spouse may be considered the employer's "successor employer" for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.
The wages for the services of an individual who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act.
Payments for the services of a child under age 18 aren't subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership in which each partner is a parent of the child.
Payments to a child under 21 are not subject to FUTA. Payments are subject to income withholding, regardless of the child’s age.
Payments for the services of a child are subject to income tax withholding as well as Social Security and FUTA if they work for:
- A corporation, even if it's controlled by the child's parents
- A partnership, even if the child's parent is a partner, unless each partner is a parent of the child
Working for Offspring
The wages for the services of a parent employed by their offspring are subject to income tax withholding and Social Security and Medicare taxes.
They are not subject to FUTA.
Employees complete Form W-4, the employee withholding allowance certificate, so their employer can withhold the correct federal income tax from their pay.
The IRS encourages everyone to use the Tax Withholding Estimator to help ensure they have the right amount of tax withheld from their paycheck.
The estimator automatically links to Form W-4, which workers can complete and submit to their employer.
The IRS provides additional tax guidance, including for: