Small Biz Issues - Do I Owe Employment Taxes For My Spouse?

When times are tough and money to hire employees is tight, many unincorporated small business owners turn to their spouses to help out. That raises the question of how to handle compensation. The answer depends on the nature of the spouses involvement.
Please note this pertains to IRS rules and that the States may have other rules.

• As long as their assistance is not frequent and regular, they don't sign paperwork on behalf of the business or have much contact with the public, then chances are you don't have to pay them and they can be considered a volunteer. The downside to this is that "volunteers" don't get any social security earnings credit.
• If their participation is more regular then consider this..Do you tell your spouse what to do (with regards to the business!) and they act more as an assistant with management decisions made by you? If this is your situation, then your spouse is an employee and you are responsible for withholding FICA (soc. sec/medicare) and income tax, as is the case with other employees.
• Do you partner on management issues, share the work load and both contributed money? If this is the case, then you are considered a partnership for tax purposes and must report business income on Form 1065 Partnership Return. Each spouse will get a schedule K-1 (think of it as what a W-2 is to an employee) and completes a Schedule E that is attaches to the joint income tax return.

Form 1065..Schedule K-1..Schedule E?? Oh gosh, more tax confusion right? Well, there is a solution. You may elect to be treated as a Qualified Joint Venture if the business is only owned by you and your spouse and you both agree. In this case, the business income (loss) is more simply divided according to each spouses interest in the business, you each complete a Schedule C and get social security earnings credit.

 As always, everyone's tax situation is unique and you should seek the personalized services of a tax professional.