Allocating Self-Employment Taxes Between Business Owner and Spouse
Last week I was visited by a 60 year old woman whose husband had died last year. For 30 years he had a successful, profitable business run as a Sole Proprietorship. And every year he dutifully paid his Self-Employment taxes, putting money into his social security account – HIS social security account. Now his widow finds that, although she helped in the business, she never got paid and now she will not be eligible for social security when she reaches 65.
This situation could have been averted. To eliminate the problem, the IRS allows the single business to be divided into two Sole Proprietorships; one for the taxpayer and the other for the spouse. The taxpayer and spouse must both materially participate as the only members of the business and must file a joint return. If they meet these criteria, they can make an election to be taxed as a “qualified joint venture”.
To make this election, they must divide all items of income, gain, loss, deduction, and credit in accordance with their respective interests in the venture. This division depends on how much of the work in the business is done by the spouse. For example, if the spouse does 30% of the work, than 30% of the business’s income, expense, and profit would be allocated to the spouse and 70% to the taxpayer. One Joint return would be filed for the couple, but it would contain a separate Schedule C (the Sole Proprietorship form) for each of them. Each Schedule C would contain their individual share of the applicable income, deduction, or loss. Then each will pay their share of the Self-Employment tax into their own account. This election will neither increase nor decrease their taxes. The benefit is that both parties are contributing to their own social security accounts.
As long as they remain qualified, the election cannot be revoked without IRS consent.
If you have any questions concerning this or any other tax area, please email or phone me. I would be glad to help.
Liberty Tax Service