Husband and Wife Business – Perfect Partnership?

October 12, 2011 : Teresa L. Clark

Gregg Farrar

There are many benefits to being in business with the right person. Could your spouse be a good business partner – for you? Let’s explore the tax considerations.

If a married couple decides not to incorporate their business, generally they must file their taxes as a partnership. However, if they meet certain requirements, they might be eligible to be considered a qualified joint venture and reap the tax benefits of this election. To qualify for this election they must be the only owners of the business, they both must participate in the business, they both must consent to this classification and the business can’t be an LLC. Special rules apply for reporting a qualified joint venture if the spouses live in a community property state.

To operate as a qualified joint venture, the participation of the spouses does not have to be 50/50. Also, they do not have to report their income 50/50; income and expenses are reported according to each spouse’s interest. Despite not having to be what is typically considered 50/50 partners, each spouse in a qualified joint venture is viewed as a sole proprietor in the business.

Simply speaking, a sole proprietor is a business owner who pays individual income tax on the business profits, reporting profit and loss on Schedule C of Form 1040. No special forms are filed to claim sole proprietorship status and it is considered the easiest business type to enter and exit.

There are pros and cons of sole proprietorship. As sole proprietors of a business, each person gets credit for their Social Security tax contributions, which is good news. On the other hand, unlike with a corporation, sole proprietors have no protection from the financial or legal problems their business might face. This is because only corporate businesses are legal entities separate from their owners.

Just like in any other work setting, when one person manages the business and directs another’s work, an employer/employee relationship is established. The employee then is subject to income tax, Social Security and Medicare withholding, and the employer must make contributions for the Social Security and Medicare taxes. Also, the couple then would not be eligible for qualified joint venture election.

No matter who you are in business with, getting the guidance of a tax professional who understands your situation can be invaluable.

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Teresa L. Clark

Teresa L. Clark

Contributor

Teresa L. Clark came to H&R Block in January 2010 after working as a civil servant for more than 13 years. Since that first tax season she has written blog posts and talking points, edited content of all shapes and sizes, facilitated media interviews for the experts in The Tax Institute at H&R Block and supported the DIY team. Clark has a master's degree in integrated marketing communications from the University of Kansas and is a member of the Honor Society of Phi Kappa Phi.