Spouses can be more than life partners. Spouses can also be business partners, or have an employer-employee relationship. Spouses involved in business together must be mindful of the various tax considerations.
Spouses who are in business together and have not incorporated must first define the nature of their business relationship, and whether it is a partnership or an employee-employer relationship. The IRS defines a partnership as a relationship in which:
- Both spouses equally share decision-making responsibilities in the business
- Both spouses "provide substantially equal services"
- Both spouses provide business capital
If a married couple meets this definition of partnership, the next question to answer is whether the spouses should consider themselves a partnership or a qualified joint venture for tax purposes.
Is A Partnership or a Joint Venture Most Effective?
Since 2007, the IRS has allowed married couples to decide whether to be treated as a partnership or a joint venture for tax purposes. When the U.S. Supreme Court held that same-sex couples enjoy all the same privileges as other married couples in 2015, same-sex couples in business together must also make this decision. In order to qualify as a joint venture, couples must meet the following criteria:
- Spouses are the only members of the partnership, and they file a joint return
- Each spouse "materially participate[s] in the business"
- Each spouse elects on a jointly filed 1040 form not to be treated as a partnership
In a joint venture, each spouse shares income, losses and deductions proportionately based on his or her share in the business. Moreover, each spouse will be credited for Social Security and Medicare taxes. As would be expected, spouses in a qualified joint venture do not have to follow the recordkeeping and filing requirements the IRS imposes on partnerships.
What Happens When One Spouse Works For the Other?
When spouses also have an employer- employee relationship, the employer spouse is required to pay the other spouse's Medicaid and Social Security taxes. The employee spouse's wages are NOT subject to Federal Unemployment Tax Act (FUTA) taxes, but are subject to income tax withholding, Social Security and Medicare taxes. For same-sex married couples, an employer spouse who paid FUTA taxes could be eligible for a refund.
Exceptional tax representation can provide tangible benefits to couples who are in business together. A skilled tax lawyer can navigate the audit process, ensure compliance with applicable regulations, and ensure that you do not pay more in taxes than required. For more than 30 years, businesses of all types have relied on the lawyers of Goldburd McCone to provide strong tax advocacy and counsel.
Sources: IRS.com, Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law, Election for Husband and Wife Unincorporated Businesses, Husband and Wife Businesses