One of the advantages of operating your own
businessis hiring family members. However, the employment tax
requirements for family employees may vary from those that apply to
other employees. Below, we point out some issues to consider when
operating a husband and wife business .
How spouses earn social security benefits
A spouse is considered an employee if there is an
employer/employee type of relationship, i.e., the first spouse
substantially controls the businessin 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. However, if the second spouse has an equal
say in the affairs of the business , provides substantially equal
services to the business , and contributes capital to the business ,
then a partnership type of relationship exists and the business's
income should be reported on Form 1065, U.S.
Return of Partnership Income (PDF).
Both spouses carrying on the trade or
business
If spouses carry on a businesstogether and share
in the profits and losses, they may be partners in a partnership
whether or not they have a formal partnership agreement. Spouses
should report income or loss from the businesson Form 1065, U.S.
Return of Partnership Income (PDF). They should not
report the income on a Form 1040 Schedule C,
Profit or Loss
From Business (PDF) in the name of one spouse as a sole
proprietor.
If each spouse is a partner in a partnership, each
spouse should carry his or her share of the partnership income or
loss from Form 1065, Schedule K-1, Partner's
Share of Income, Credits, Deductions, etc. (PDF), to their joint
or separate Form(s) 1040. Each spouse should include his or her
respective share of self-employment income on a separate Form 1040
Schedule SE, Self-Employment
Tax (PDF). Self-employment income belongs to the person who is
the member of the partnership and cannot be treated as
self-employment income by the nonmember spouse, even in community
property states. 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. However, this may
not be true if either spouse exceeds the social security tax
limitation. Refer to Publication 553,
Highlights
of 2002 Tax Changes , for further information about
self-employment taxes.
One spouse employed by another
If your spouse is your employee, 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 businessare subject to income tax withholding
and social security and Medicare taxes, but not to FUTA tax. For
more information, refer to Publication 15, Circular E, Employer
Tax Guide.
