The IRS has posted a webpage that alerts taxpayers to some issues to consider when operating a business as a married couple. Employment tax requirements for family employees may vary from those that apply to other employees.
Employer-employee relationship. A spouse is considered an employee if there is an employer/employee type of relationship. For example, the first spouse substantially controls the business in 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 federal income tax and FICA (Social Security and Medicare) withholding.
Partnership relationship. 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.
Qualified joint venture. According to Code Sec. 761(f), a qualified joint venture whose only members are a married couple filing a joint return is allowed to not be treated as a partnership for federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if it meets a number of criteria.
Joint return filing not treated as partnership. A qualified joint venture conducted by a married couple who file a joint return is not treated as a partnership for federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses following in accordance with their respective interests in the venture. Each spouse considers his or her respective share of these items as a sole proprietor. Each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of figuring out net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes.
Spouse is an employee. When a spouse is an employee and not a partner, Social Security and Medicare taxes must be paid. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to federal income tax withholding and Social Security and Medicare taxes, but not to Federal Unemployment Tax Act (FUTA) tax.
Family employees. IRS Publication 15 contains a section that discusses businesses owned and operated by spouses and also a section on family employees. The annual publication says that payments for the services of a child under age 18 who works for their parent in a trade or business aren't subject to Social Security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to Social Security and Medicare taxes until the child reaches age 21.
FUTA and federal taxation for family employees. Payments for the services of a child under age 21 who works for their parent, whether or not in a trade or business, are not subject to FUTA tax. But when it comes to federal income tax withholding, payments for the services of a child of any age who works for their parent are generally subject to this tax unless the payments are for domestic work in the parent's home. There is also an exception if the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work.BACK TO LIST