Husbands and wives often participate together in business ventures. “What are the tax implications of unincorporated husband-wife business activity?” you ask. Good question.
Partnership Tax Status is Unfavorable for Husband-Wife Business when both members of a married couple in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answers is important because it can have a huge impact on the couple’s self- employment tax situation. Here why?
For 2020, the first $137,700 of an individual’s net self-employment income, including any net self-employment income from a husband-wife partnership, gets hit with the maximum 15.3% self-employment tax rate.
That 15.3% rate comprises 12.4% for the Social Security tax component and 2.9% for the Medicare tax component. At net self-employment income levels above the Social Security tax ceiling ($137,700 for 2020), the 2.9% Medicare tax continues to apply- and increases to 3.8% when the 0.9% additional Medicare tax kicks in.
Key point: For a joint-filing couple, the 0.9% additional Medicare tax kicks in once joint net self-employment income exceeds %250,000 ( assuming no wages income is also potentially subject to the 0.9% additional Medicare tax).
So, if both you and your spouse have significant net self-employment income from a husband-wife partnership, you both may have to pay the dreaded maximum 15.3% self-employment tax rate on the first $137,700 of your respective shares of self-employment income for the partnership. That self-employment tax hit is on top of the income tax bill. Ouch!
A husband-wife partnership must also file annual federal returns on Form 1065 along with related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.
To schedule a free consultation and discuss additional business tax strategies, contact Contact Meese Khan, LLP today!
Phone: 623 935 1005