- Who is Self-Employed?
- What Are My Self-Employed Tax Obligations?
- How Do I Make My Quarterly Payments?
- How Do I File My Annual Return?
- Am I Required to File an Information Return?
- Business Structures
- Home Office Deduction
- Married Couples Business – What is a Qualified Joint Venture?
- Considering a Tax Professional
- Online Learning Tools
Who is Self-Employed?
Generally, you are self-employed if any of the following apply to you.
A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
If you are a sole proprietor use the information in the chart below to help you determine some of the forms that you may be required to file.
|IF you are liable for:||THEN use Form:|
|Self-employment tax||Schedule SE (Form 1040), Self-Employment Tax|
|Estimated tax||1040-ES, Estimated Tax for Individuals|
|Social security and Medicare taxes and income tax withholding|
|Providing information on social security and Medicare taxes and income tax withholding|
W-2, Wage and Tax Statement (to employee)
and W-3, Transmittal of Wage and Tax Statements (to the Social Security Administration)
|Federal unemployment (FUTA) tax||940, Employer’s Annual Federal Unemployment (FUTA) Tax Return|
|Filing information returns for payments to nonemployees and transactions with other persons||See Information Returns|
|Excise Taxes||Refer to the Excise Tax Web page|
Independent Contractor Defined
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.
However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors or Employees.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.
If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.
|If you are a partnership then you may be liable for…||Use Form…||Separate Instructions…|
|Annual return of income||1065,U.S. Return of Partnership Income (PDF)||Instructions for Form 1065 U.S. Return of Partnership Income(PDF)|
941, Employer’s Quarterly Federal Tax Return (PDF) and 943, Employer’s Annual Federal Tax Return for Agricultural Employees(for farm employees) (PDF)
|Excise Taxes||Refer to the Excise Tax Web page|
|If you are a partner (individual) in a partnership then you may be liable for…||Use Form…||Separate Instructions…|
|Income Tax||1040, U.S. Individual Income Tax Return(PDF) and Schedule E (Form 1040), Supplemental Income and Loss (PDF)||Instructions for 1040 U.S. Individual Income Tax Return (PDF)|
|Self-employment tax||1040, U.S. Individual Income Tax Return(PDF) and Schedule SE (Form 1040), Self-Employment Tax (PDF)||Instructions for Schedule SE (Form 1040)(PDF)|
|Estimated tax||1040-ES, Estimated Tax for Individuals (PDF)|
Trade or Business
A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.
You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.
Example: You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. You are self-employed as the owner of a part-time repair shop.
What are My Self-Employed Tax Obligations?
Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).
Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information.
About Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
This publication contains general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees.
Other Items You May Find Useful
You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.
Who Must Pay Estimated Tax
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. See the worksheet in Form 1040-ES, Estimated Tax for Individuals (PDF), or Form 1120-W, Estimated Tax for Corporations (PDF), for more details on who must pay estimated tax.
Who Does Not Have To Pay Estimated Tax
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
How To Figure Estimated Tax
Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES (PDF), to figure estimated tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year’s federal tax return as a guide. You can use the worksheet in Form 1040-ES(PDF) to figure your estimated tax. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.
You must make adjustments both for changes in your own situation and for recent changes in the tax law.
Corporations generally use Form 1120-W (PDF), to figure estimated tax.
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods. Each period has a pay online, by phone, or by mail, refer to the section of Form 1040-ES titled “How to Pay Estimated Tax.” For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (PDF) (or Form 2220, Underpayment of Estimated Tax by Corporations),to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 Instructions or Form 1120 Instructions (PDF), for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
Expanded penalty waiver available if 2018 tax withholding and estimated tax payments fell short; refund available for those who already paid 2018 underpayment penalty
The IRS lowered to 80 percent the threshold required for certain taxpayers to qualify for estimated tax penalty relief if their federal income tax withholding and estimated tax payments fell short of their total tax liability in 2018. In general, taxpayers must pay at least 90 percent of their tax bill during the year to avoid an underpayment penalty when they file. Earlier this year, the IRS lowered the underpayment threshold to 85 percent and recently lowered it to 80 percent for tax year 2018.
This additional expanded penalty relief for tax year 2018 means that the IRS is waiving the estimated tax penalty for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.
Taxpayers who have not filed yet should file electronically. The tax software was updated and uses the new underpayment threshold and will determine the amount of taxes owed and any penalties or waivers that apply. This penalty relief is also included in the revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
Taxpayers who have already filed their 2018 federal tax return but qualify for this expanded relief may claim a refund of any estimated tax penalty amount already paid or assessed. To claim the refund, they will file Form 843, Claim for Refund and Request for Abatement. Taxpayers cannot file this form electronically. They should include the statement “80% waiver of estimated tax penalty” on line 7 of Form 843.
How Do I Make My Quarterly Payments?
Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals (PDF), is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.
Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
EFTPS: The Electronic Federal Tax Payment System
The Easiest Way to Pay All Your Federal Taxes
EFTPS® offers …
Security You Can Count On
EFTPS® is a secure government web site that allows users to make federal tax payments electronically. Every user must have a secure Internet browser with 128-bit encryption in order to access the site. To log on to the system, an enrolled user must be authenticated with three pieces of unique information: Taxpayer Identification Number (EIN or SSN), EFTPS® Personal Identification Number (PIN) and an Internet Password. The combination of these three pieces of identification adds to the security of the site and the privacy of taxpayer data.
Convenience at Your Fingertips
- EFTPS® offers you the convenience and flexibility of making your tax payments via the Internet or phone. You can initiate your tax payment from your home or office, 24/7.
- You can easily keep track of your payments by opting in for email notifications when you enroll or update your enrollment for EFTPS. Email notification will contain the confirmation number you receive at the end of a payment transaction. The IRS continues to remind taxpayers to watch out for email schemes. You will only receive an email from EFTPS if you’ve requested the service.
- Businesses and Individuals can schedule payments up to 365 days in advance. Scheduled payments can be changed or cancelled up to two business days in advance of the scheduled payment date.
- You can use EFTPS® to make all your federal tax payments, including income, employment, estimated and excise taxes.
- You can check up to 16 months of your EFTPS® payment history online or by calling EFTPS® Customer Service.
Accuracy You Can Depend On
By 8 p.m. ET at least one calendar day in advance of the due date, submit your payment instructions to EFTPS® to move the funds from your account to the Treasury’s account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You will receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made.
To enroll, or for more information on enrollment, visit EFTPS® or call EFTPS® Customer Service to request an enrollment form:
- 1-877-333-8292 (Federal Agencies)
- 1-800-733-4829 (TDD Hearing-Impaired)
- 1-800-244-4829 (Español)
EFTPS Inquiry PIN
When Payroll Service Providers enroll clients in EFTPS an EFTPS Inquiry PIN will automatically be sent to the taxpayer. Taxpayers who have had activity on their EFTPS account over the prior 12 months will also receive Inquiry PINs. This Inquiry PIN allows the taxpayer access to monitor the EFTPS for transactions made on their behalf.
And there’s more…
Tax professionals, accountants, and payroll companies are discovering the added benefits of using EFTPS®.
- EFTPS® via the Internet or phone – Once enrolled, individual and business taxpayers can use the Internet to make all their federal tax payments via the Internet, or phone using the EFTPS® Voice Response System. Both payment methods are interchangeable.
- EFTPS® Batch Provider – Tax professionals/providers can register through this software and send up to 1,000 enrollments and 5,000 payments in one transaction. Users can synchronize enrollments and payments between the software and EFTPS® database in real-time. To download the EFTPS® Batch Provider Software and User’s Manual visit EFTPS® and follow these steps:
- Click on HELP & INFORMATION
- Click on Downloads
- Click on Batch Provider Software User’s Manual
- Click on Software (left side of screen) for additional information
- EFTPS® Bulk Provider – Designed for payroll processors who initiate frequent payments from and desire automated enrollment through an Electronic Data Interchange (EDI) compatible system.
Additional Information is available below:
Publication 966 – Electronic Federal Tax Payment System A Guide to Getting Started
Publication 4990 – EFTPS Payment Instruction Booklet for Business and Individual Taxpayers
EFTPS® – Treasury’s free service for paying federal taxes for individuals and businesses
How Do I File My Annual Return?
To file your annual tax return, you will need to use Schedule C (PDF) or Schedule C-EZ (PDF) to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C Instructions (PDF) may be helpful in filling out this form.
Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.
In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self-Employment Tax (PDF). Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The Instructions (PDF) for Schedule SE may be helpful in filing out the form.
Am I Required to File an Information Return?
If you made or received a payment as a small business or self-employed (individual), you are most likely required to file an information return to the IRS.
If you made or received a payment during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS. This page is applicable to specific and limited reporting requirements. For more detailed information, please see General Instructions for Certain Information Returns or specific form instructions.
Do not file Copy A of information returns downloaded from the IRS website. The official printed version of the IRS form is scannable, but the online version of it, printed from the website, is not. A penalty may be imposed for filing forms that cannot be scanned.
Made a Payment
If, as part of your trade or business, you made any of the following types of payments, use the link to be directed to information on filing the appropriate information return.
- Payments, in the course of your trade or business: (1099-MISC) (Note: It is important that you place the payment in the proper box on the form. Refer to the instructions for more information.)
- Services performed by independent contractors or others (not employees of your business) (Box 7)
- Prizes and awards and certain other payments (see Instructions for Form 1099-MISC, Box 3. Other Income, for more information)
- Rent (Box 1)
- Royalties (Box 2)
- Backup withholding or federal income tax withheld (Box 4)
- Crewmembers of your fishing boat (Box 5)
- To physicians, physicians’ corporation or other supplier of health and medical services
- For a purchase of fish from anyone engaged in the trade or business of catching fish (Box 7)
- Substitute dividends or tax exempt interest payments and you are a broker (Box 8)
- Crop insurance proceeds (Box 10)
- Gross proceeds of $600 or more paid to an attorney (generally, Box 7, but see instructions as Box 14 may apply)
- Interest on a business debt to someone (excluding interest on an obligation issued by an individual) (1099-INT)
- Dividends or other distributions to a company shareholder (1099-DIV)
- Distribution from a retirement or profit plan or from an IRA or insurance contract (1099-R)
- Payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third party network transaction (1099-K)
Received a Payment and Other Reporting Situations
If, as part of your trade or business, you received any of the following types of payments, use the link to be directed to information on filing the appropriate information return.
- Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals (1098)
- Sale or exchange of real estate (1099-S)
- You are a broker and you sold a covered security belonging to your customer (1099-B)
- You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others (Form 8937)
- You released someone from paying a debt secured by property or someone abandoned property that was subject to the debt (1099-A) or otherwise forgave their debt to you (1099-C)
- You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (1099-MISC)
- If you are a recipient or payee of an Incorrect Form 1099-MISC contact the payor. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
- If you are a recipient or payee expecting a Form1099-MISC and have not received one, contact the payor.
Not Required to File Information Returns
You are not required to file information return(s) if any of the following situations apply:
- You are not engaged in a trade or business.
- You are engaged in a trade or business and
- the payment was made to another business that is incorporated, but was not for medical or legal services or
- the sum of all payments made to the person or unincorporated business is less than $600 in one tax year
Need help? If you have questions about information reporting, you may call 1-866-455-7438 (toll-free) or 304-263-8700 (not toll free). Persons with a hearing or speech disability with access to TTY/TDD equipment can call 304-579-4827 (not toll free).
When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Visit the Business Structures page to learn more about each type of entity and what forms to file.
When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.
For additional information, refer to Small Business Administration’s Choose a business structure web page.
Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simplified option for computing the home office deduction (IRS Revenue Procedure 2013-13, January 15, 2013). The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners.
This new simplified option can significantly reduce the burden of recordkeeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.
Taxpayers using the regular method (required for tax years 2012 and prior), instead of the optional method, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Requirements to Claim the Home Office Deduction
Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:
- Regular and exclusive use.
- Principal place of your business.
Regular and Exclusive Use.
You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
Principal Place of Your Business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:
- Your business use must be for the convenience of your employer.
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home. In this publication you will find:
- Requirements for qualifying to deduct expenses (including special rules for storing inventory or product samples).
- Types of expenses you can deduct.
- How to figure the deduction (including depreciation of your home).
- Special rules for daycare providers.
- Tax implications of selling a home that was used partly for business.
- Records you should keep.
- Where to deduct your expenses (including Form 8829, Expenses for Business Use of Your Home, required if you are self-employed and claiming this deduction using the regular method).
The rules in the publication apply to individuals.
Married Couples Business – What is a Qualified Joint Venture?
Married Couples Business
The employment tax requirements for family employees may vary from those that apply to other employees. On this page we point out some issues to consider when operating a married couples business.
Election for Married Couples Unincorporated Businesses
For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a married couples filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.
One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees. Below, we point out some issues to consider when operating a business as a married couple.
How spouses earn Social Security benefits
A spouse is considered an employee if there is an employer/employee type of relationship, i.e., 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 income tax and FICA (Social Security and Medicare) withholding. However, 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 (PDF).
Both spouses carrying on the trade or business
On May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.
The provision generally permits a qualified joint venture whose only members are a married couple filing a joint return not to 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 (1) the only members of the joint venture are a married couple who file a joint tax return, (2) both spouses materially participate in the trade or business, (3) both spouses elect to have the provision apply, and the business is co-owned by both spouses and (4) isn’t held in the name of a state law entity such as a partnership or limited liability company (LLC).
Under the provision, 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 in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of determining 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 under the provision (i.e., in accordance with their respective interests in the venture).
This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation. Refer to Publication 334, Tax Guide for Small Business, for further information about self-employment taxes. For more information on qualified joint ventures, refer to Election for Married Couples Unincorporated Businesses.
One spouse employed by another
If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax. For more information, refer to Publication 15, Circular E, Employer Tax Guide.
An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a married couple filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.
Reasons Why a Married Couple Might Want to Make the Election Not to be Treated as a Partnership
Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses must comply with filing and record keeping requirements imposed on partnerships and their partners. Married co-owners failing to file properly as a partnership may have been reporting on a Schedule C in the name of one spouse, so that only one spouse received credit for social security and Medicare coverage purposes. The election permits certain married co-owners to avoid filing partnership returns, provided that each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit. Under the election, both spouses will receive credit for social security and Medicare coverage purposes.
Definition of a Qualified Joint Venture
A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company) (See below). Note also that mere joint ownership of property that is not a trade or business does not qualify for the election. The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse’s interest in the business. The meaning of “material participation” is the same as under the passive activity loss rules in section 469(h) and the corresponding regulations (see Publication 925, Passive Activity and At-Risk Rules). Note that, except as provided in section 469(c)(7), rental real estate income or loss generally is passive under section 469, even if the material participation rules are satisfied, and filing as a qualified joint venture will not alter the character of passive income or loss.
How to Make the Election to be Treated as a Qualified Joint Venture
Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit of Loss From Farming and, if otherwise required, a separate Schedule SE (Form 1040), Self-Employment Tax. For example, to make the election for 2014, jointly file your 2014 Form 1040, with the required schedules (see below). The partnership terminates at the end of the taxable year immediately preceding the year the election takes effect. For information on how to report the business for the taxable year before the election is made, see Publication 541 on Partnerships and terminations.
A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election
Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states.
How to Report Federal Income Tax as a Qualified Joint Venture (Including Self-Employment Tax)
Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes. The spouses must share the businesses’ items of income, gain, loss, deduction, and credit. Therefore, the spouses must take into account the items in accordance with each spouse’s interest in the business. The same allocation will apply for calculating self-employment tax if applicable, and may affect each spouse’s social security benefits. Each spouse must file a separate Schedule C (or Schedule F) to report profits and losses and, if otherwise required, a separate Schedule SE to report self-employment tax for each spouse. Spouses with a rental real estate business not otherwise subject to self-employment tax must check the QJV box on Line 2 of Schedule E.
However, if there are other net earnings from self-employment of $400 or more, the spouse(s) with the other net earnings from self-employment should file Schedule SE without including the amount of the net profit from the rental real estate business from Schedule E on line 2. If the election is made for a farm rental business that is not included in self-employment, file two Forms 4835 instead of Schedule F.
In General, Spouses Do NOT Need an Employer Identification Number (EIN) for the Qualified Joint Venture
Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes. Using the rules for sole proprietors, an EIN is not required for a sole proprietorship unless the sole proprietorship is required to file excise, employment, alcohol, tobacco, or firearms returns. If an EIN is required, the filing spouse should complete a Form SS-4 and request an EIN as a sole proprietor.
What to Do if the Spouses Already Have an EIN for the Partnership
One spouse cannot continue to use that EIN for the qualified joint venture. The EIN must remain with the partnership (and be used by the partnership for any year in which the requirements of a qualified joint venture are not met). If you need EINs for the sole proprietorships, see above on EINs for sole proprietors.
How to Handle Requests from the IRS for a Partnership Return from the Spouses for Tax Years for Which the Election is in Effect
Once the election is made, if the spouses receive a notice from the IRS asking for a Form 1065 for a year in which the spouses meet the requirements of a qualified joint venture, the spouses should contact the toll-free number that is shown on the notice and advise the telephone assistor that they reported the income on their jointly-filed individual income tax return as a qualified joint venture. Alternatively, the spouses can write to the address shown on the notice and provide the same information.
If the Spouses Elect to be Treated as a Qualified Joint Venture, How Do They Report and Pay Federal Employment Taxes?
If the business has employees, either of the sole proprietor spouses may report and pay the employment taxes due on wages paid to the employees, using the EIN of that spouse’s sole proprietorship. If the business already filed Forms 941 or deposited or paid taxes for part of the year under the partnership’s EIN, the spouse may be considered the “successor employer” of the employee for purposes of determining whether the wages have reached the social security and Federal unemployment wage base limits. See Publication 15 for more information on the successor employer rules. See above regarding the allocation of the deductions for income tax purposes.
Duration that the Election Remains in Effect
Once the election is made, it can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.
Online Learning Tools
The Small Business Taxes: The Virtual Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities. The IRS Video Portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals.