Is your business a husband and wife business?
If you own your own business, a nice benefit is that you can hire whomever you choose, including family members. Some of the employment tax requirements for family members are different from those that apply to other individuals. You may want to consider the different scenarios as you decide how to handle your family business. The manner in which your business is treated will determine your social security obligation and your spouse’s, and how each of you earns social security benefits.
Your spouse will be subject to federal income tax and FICA payroll withholdings if he or she is considered your employee. That means that if you substantially control the business and make the management decisions and your spouse is under your direction, you’re the employer and he or she is the employee. You’ll be required to pay Social Security and Medicare taxes for your spouse. Your spouse’s wages will be subject to income, Social Security and Medicare tax withholdings, but not to federal unemployment tax.
Qualified Joint Venture or Partnership
If your spouse contributes capital, shares equally in management decisions and the handling of business affairs, and provides an equal amount of services to the business, then your business relationship will be classified as a partnership, not employer-employee. In that case, the business’s income will be reported either as a partnership or as a qualified joint venture.
A qualified joint venture is permitted only under certain circumstances. Only the husband and wife may be members of the venture, filing a joint tax return that will not be treated as a partnership. Also, both the husband and the wife must participate in the business, and both spouses must elect to have this provision apply. As a qualified joint venture, the business’s income, gains, losses, credits and deductions are divided between the husband and wife according to their respective interests in the business. Each spouse will account for his or her share on the appropriate tax form, often a Schedule C, as a sole proprietor. To determine net earnings from self employment, each person’s share of the income or loss is taken into account just as it is for Federal income tax purposes. Generally, this will not increase the couple’s total tax liability, and each spouse will earn credit for Social Security earnings. This may be valuable to you because your future retirement earnings and other benefits will be based on your respective cumulative Social Security earnings.
If you have any questions related to the tax treatment of your husband and wife business in Houston, please call Hodgson CPA and speak with one of our knowledgeable, qualified tax experts.