Starting a family-owned company is a dream for many, a way to support one’s family financially while capitalizing on their unique skills and insights. Because members of the family are so vested in the success of the business, they also happen to make some of the best employees. Ann Irons, a certified public accountant who provides small business payroll, accounting, and bookkeeping services, discusses considerations for the modern mom-and-pop business model.
Employee, Partner, or Joint Venture?
How do you determine whether your spouse qualifies as an employee? First, there must be an employer-employee relationship in which one spouse exerts substantially more control over management and operations. For example, suppose Mr. Smith owns a lawn care business and employees 10 landscapers and gardeners. He oversees all aspects of business development, hiring, and marketing for the company. He pays Mrs. Smith to answer phones and dispatch workers to clients’ locations. In this case, Mrs. Smith is considered an employee. As an employee of Mr. Smith’s company, she is subject to withholding for income tax, Medicare, and Social Security. If Mr. and Mrs. Smith share equal control over business matters, contribute equally, and make comparable investments in the business, then Mrs. Smith is considered a partner, not an employee. As a partnership, the company will report its income on the U.S. Return of Partnership Income, Form 1065.
What if Mr. and Mrs. Smith are the only two employees on the payroll—no landscapers, no gardeners—and each has control over the business? In this case, they would defer to the Small Business and Work Opportunity Act passed in 2007. For purposes of filing federal taxes, Mr. and Mrs. Smith can now be considered a qualified joint venture, not a partnership. Three requirements must be met:
- Mr. and Mrs. Smith elect to apply the provision
- Mr. and Mrs. Smith are the only two members of the venture, and
- Mr. and Mrs. Smith both participate in their business or trade
More on Qualified Joint Ventures
What does this mean for mom and pop? You and your spouse needn’t have exactly equal interests when filing as a qualified joint venture. Each will report profits, losses, income, credit, and deductions proportionate to their interest in the shared venture, albeit as sole proprietor rather than partner. Irons, who has extensive experience and knowledge of taxation, can assist you and your spouse as you complete Schedule C, where you will report your respective share. Your Bellingham CPA will also walk you through the process for determining your net earnings as a self-employed taxpayer.
Questions about small business taxes? To learn more about income tax and payroll services in Bellingham, MA, or to schedule a meeting with Ann Irons, CPA, LLC, contact our office at (508) 966-0700. We provide tax, accounting, and bookkeeping services for individuals and businesses in Boston, Bellingham, Woonsocket, Milford, Medway, and the surrounding areas.