New client new Sch C business who wants to know if she can pay her husband (taxpayer) for labor he performed getting her office ready and use as a business deduction? They file MFJ.
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Yes, but then he would include it in his income, so it is a wash overall. Plus you might have to file a 1099-MISC or W-2. I'm assuming the labor was relatively minimal and doesn't need to be capitalized along with the home office.Last edited by MilTaxEA; 09-11-2012, 07:56 PM.Michael -
I probably would not do on a 1099 Form, but agreed, should be on W-2 with at least FICA-MCare and if any, associated State Withholdings. Could include Fed or State Withholding
So would involve either Form 941 or Form 944 Fed - Associated State Payroll Returns. and W-2 forms, etc at end of the year.
It is a shifting of income - is there a reason for this - such as Health Insurance, or Social Security Benefits
Would depend on the $$ amount as to whether it is worth the time, effort and accounting/payroll fees.
SandyLast edited by S T; 09-12-2012, 07:46 PM.Comment
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Line 21 income
Assume its $5K. If that is box 7 income (other income) on form 1099-misc entered on ln 21 form 1040, I dont believe the $5K would be subject to SE for the husband but on the flip side, if the husband had exps involved with the labor like auto exps, etc., he may end up with $2500 of net profit (Sch C) subject to SE. I hand calculated it out: $5K X 20% Fed & St income tax = $1K. $2500 X 15.3% SE tax + 20% Fed & St tax = $882.Originally posted by MilTaxEA View PostComment
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Should not be box 7
AZ:Originally posted by AZ-Tax View Post
This should not be box 7 other income. The stated that he was performing labor for the business. That is box 3 non-employee comp.
DustyComment
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You got it back words.. box 7 is non employee comp.. box 3 is other income.Originally posted by Dusty2004 View Post
chrisComment
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escape some self-employment tax
By shifting some of the money to the husband, if the amount is under $400, the husband would owe no Self-Employment tax, thereby saving the couple a little bit of money.
If she paid him $2000, could this be one-time Hobby income for him (not subject to Self-Employment tax).
I agree that the Federal Income tax wouldn't be affected by this shifting, but there could be some Self-Employment tax savings.
Another reason to shift income would not necessarily be a savings on the yearly tax returns, but to shift some Soc Security credits from her to him.Comment
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Whoops
I read what AZ had posted and was not thinking or looking at the box numbers. Sorry all.Originally posted by spanel View Post
DustyComment
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AZ, I thought you were in a community property state. Is my memory flaky, or are these clients from elsewhere?Comment
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My understanding
is that in a community property state income has to be allocated between spouses such that each gets half of their own income, half of their spouse's income and half of their joint income. I have never done a return for someone in a community property state but like the last poster I am not sure what difference this ends up making unless the spouses file separately.Comment
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I've done community property returns being in Washington obviously. Generally we ignore the community property laws - unless filing MFS, like you said. The community property rules on business are basically rooted in Revenue Procedure 2002-69.Originally posted by erchess View Post
TLDR: 2002-69 lets you file either as a disregarded entity, or you file a partnership return. Obviously a partnership is 1065, disregarded entity in this case is Schedule C.SECTION 4. APPLICATION
.01 If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes.
.02 If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a partnership for federal tax purposes and file the appropriate partnership returns, the Internal Revenue Service will accept the position that the entity is a partnership for federal tax purposes.
Obviously it really doesn't matter who you report business income to on a joint return. If you file separate returns you end up putting some of it on each (generally 50%).
The SE tax does matter though. How about the SE tax? (Schedule SE instructions)
So if only one spouse participates, all the SE goes to the one spouse. If both spouses participate you might have a split.If any of the income from a business (including farming) is community income, then the income and deductions are reported based on the following.
If only one spouse participates in the business, all of the income from that business is the self-employment earnings of the spouse who carried on the business.
If both spouses participate, the income and deductions are allocated to the spouses based on their distributive shares.
If either or both you and your spouse are partners in a partnership, see Partnership Income or Loss, later.
If you and your spouse elected to treat the business as a qualifying joint venture, see Qualified Joint Ventures, later.
And again, for MFS:
So basically with MFS returns you'd end up reporting half on each return, but ALL of the SE tax on whoever carried on the business.If you are the spouse who carried on the business, you must include on Schedule SE, line 3, the net profit or (loss) reported on the other spouse's Schedule C, C-EZ, or F (except in those cases described later under Income and Losses Not Included in Net Earnings From Self-Employment). Enter on the dotted line to the left of Schedule SE, line 3, “Community income taxed to spouse” and the amount of any net profit or (loss) allocated to your spouse as community income. Combine that amount with the total of lines 1a, 1b, and 2 and enter the result on line 3.
If both spouses participate you can split it by their distributive share - but the same is true in non-community property states (either with 1065 or QJV). There isn't any difference as far as SE tax is concerned. And shifting income from one spouse to the other not-for-SE purposes doesn't do anything useful on a joint return - might on MFS returns. I don't think AZ being a community property state matters, since you don't split SE tax for community property income. (Weird exception for same-sex marriages in community property states.)Last edited by David1980; 09-13-2012, 04:24 PM.Comment
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The question about community property came to me before AZ gave the motivation, but I was just letting it simmer in my head before asking it.
What I was wondering originally was whether community property rules might preclude a W-2, since he is presumably half owner of the capital invested in the company. And even if the 1099-MISC would be the correct reporting in a non-community property state, would that be allowed here? After all, if the wife did the work, it couldn't be deducted since she's the owner.
This is just idle speculation. I haven't dealt with community property issues, either, so I'm just exercising my thought patterns concerning possible issues.Comment
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I had an artist client who had a sole proprietorship business who did this for years. She paid her spouse for installations of stained glass (in church windows, homes, etc.). She would have had to pay somebody to do this regardless. He was otherwise a full-time employee, civil service. She deducted the amt on her Sche C, he reported it and paid SE taxes. It was done primarily for him to qualify under SS, but it was a legitimate expense for work he actually performed. Not a community property state.Comment
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