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I Started a Business With My Spouse. Do We Have to File a Tax Return?

There’s a million things to consider when first starting a business, and unfortunately many of those items revolve around tax and tax reporting. In addition to federal filing and paying requirements, you may also have state and local reporting requirements.

If you’ve just recently started a business with your spouse, you know you and your new business partner have a lot to do. And filing a tax return is one of those things.

Your spouse and you will likely be required to file a Form 1065 Partnership Information Return. This information return is purely to report the income and expenses of the business. After these items are reported on the Partnership return, the net income and other items (such as Health Insurance paid on behalf of the partners) are reported on Schedules K-1. 

Think of Schedules K-1 like a W-2 for a wage earner. The net income is essentially the wages that would have been paid to an employee. However, tax likely was not withheld from this income. Also, the income reported to each partner is distributed based on percentage of ownership in the business. 

If no other percentage is specified, it is generally assumed that each owner has equal percentage ownership (for spouses, 50% each). 

It should be noted that Form 1065 and Schedules K-1 are considerably more difficult to fill out than a Schedule C attachment on a normal tax return for a sole proprietor.

Because of this, the IRS allows a special rule for married couples starting a new business. If you are what is considered a Qualified Joint Venture, you and your spouse can elect to file two separate Schedules C (each reporting equal amounts of revenues and expenses) and attach them to your tax return.

In order to make this election, you must not be recognized as a state organized entity (like an LLC). 

The rules are set up this way specifically to give both spouses credit for Social Security and Medicare earnings under their Social Security Numbers.

 


This article is not meant to constitute tax or legal advice. For help regarding your situation, please consult a local professional.

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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