If you’ve been keeping up with our Business Taxes blog post series, you’re starting to see that there are many different sets of very specific stipulations made by the IRS. One category that has many different scenarios is the type of employees employed by a business. While this might seem like a simple two-option situation with a company either employing W-2 employees or 1099 independent contractors, as we’ve been learning, the devil is in the details.
In our last two posts, we’ve covered different scenarios stipulated by the IRS regarding a business employing family members. In the first of the two, Business Taxes: Employing Family, we discussed the tax responsibilities associated with a parent employing a child. In our most recent post, Business Taxes: Employing Parents, we discussed the scenarios and corresponding differences associated with a child employing a parent. In another post, we also discussed the differences to keep in mind when hiring Part Time or Season Help (read more here: Business Taxes: Employment Tax Withholdings for Part Time or Season Help).
In today’s post we’ll discuss the differences associated with married couples working together or employing each other and in the following post, we’ll discuss the IRS implications of spouses in a business partnership.
Employment Taxes & Employing Spouses
As of February 26th, 2021, the IRS Page Married Couples in Business, agrees with our assessment above, saying that “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.”
The same page, Married Couples in Business, as of February 26th, 2021, goes on to say that “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 (PDF).”
As you can see, the type of employer/employee working relationship established between the spouses is extremely important when it comes to their tax responsibilities. If one spouse is clearly the owner of the business and employs the other spouse, treating them like any other employee, then they are treated like a normal employee by the IRS. But, as the above paragraph says, if the employed spouse acts more like an equal in the business than an employee, there are different tax responsibilities and paperwork required.
In our next blog post, Business Taxes: Employing Spouses – Business Partnership, we’ll go into more detail about the second scenario – where a spouse either acts as a partner in the business or is an established business partner. Check back soon!