Filing Taxes as a Husband and Wife Business

All marriages are business arrangements of sorts, and all businesses are, to varying degrees, like marriages. But when spouses own and operate a business together, it is important to ensure its incorporated structure doesn't become a liability at tax time.

Employee, Partner or Joint Venture

The IRS offers three different filing statuses for husbands and wives who jointly operate a business. There are advantages and drawbacks with all three, depending on roles of each spouse within the business.

Employee: In this scenario one spouse is the business owner while the other is an employee. On the job, they have an employer-employee relationship. In this type of arrangement, the employee-spouse's salary is subject to income tax and FICA (Social Security and Medicare) withholding, but may not be subject to the Federal Unemployment Tax Act (FUTA). For more information on this please visit the IRS Employer Tax Guide in Publication 15.

Partnerships: If both spouses have invested capital and have a relatively equal say in operational and management decisions, the business qualifies as a partnership and taxes can be filed using Form 1065, "U.S. Return of Partnership Income." Under a partnership, only one spouse can claim a business's income and expenses on Schedule C; therefore, only the listed spouse receives Social Security and Medicare credit or absorbs any outstanding tax liabilities should there be any.

Qualified Joint Ventures: Spouses who own and operate a business together have had the option of electing to file as a "qualified joint venture" (QJV) since 2007. A partnership qualifies as a QJV if spouses file jointly, are the business's only partners, and both "materially participate" in the operation. A QJV's advantage is in allowing each partner to file as sole proprietors to individually accrue Medicare and Social Security credits for retirement. As a QJV, everything is divided 50-50. If, for instance the business generated $80,000 in revenue and incurred expenses of $30,000, each spouse would report $40,000 in income and $15,000 in expenses on their Schedule C and pay the appropriate taxes. IRS Publication 334, "Tax Guide for Small Business" and "Election for Husband and Wife Unincorporated Businesses" provide in-depth detail on QJVs.

Don't Overlook State Regulations

Regardless of which option a couple chooses in defining their marriage-business tax liabilities, don't overlook state laws. For instance, businesses incorporated as LLPs (Limited Liability Partnerships) and LLCs (Limited Liability Corporations) do not qualify for QJVs except in the nation's nine community-property states. These are states that have specific rules for the treatment of a married couples joint property. The nine states with these laws are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

Q&A: Does my small business file by calendar year or fiscal tax year?

Here are a few questions to answer which can help to determine if you file your taxes according to a calendar year or fiscal tax year:

1. Did you keep books or records? If not you are a "calendar year" taxpayer.
2. Do you have an annual accounting period? If not you are a "calendar year" taxpayer.
3. Have you been told you have to be a calendar year payer? Then obviously, you must file accordingly.

If you wish to change the reporting method by which you file, you must first get approval from the Internal Revenue Service. You will need to prepare an application to "Adopt, Change or Retain" a tax year in order to switch reporting methods.

It's important to note that even if you were not in business for an entire year, you are required to report your business income, even if you were only in business a few months. In this situation, you may be eligible to file a "Short Tax Year" form.