Business Owned and Operated by Spouses

If you and your spouse jointly own and operate a business and share in the profits and losses, you may be partners in a partnership, whether or not you have a formal partnership agreement. See Pub. 541 for more details. The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees.

Exception—qualified joint venture.

For tax years beginning after 2006, the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. A qualified joint venture conducts a trade or business where:

The only members of the joint venture are spouses who file a joint income tax return,

Both spouses materially participate (see Material participation in the instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property isn’t enough),

Both spouses elect to not be treated as a partnership, and

The business is co-owned by both spouses and isn’t held in the name of a state law entity such as a partnership or limited liability company (LLC).

To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse’s interest in the venture, and reported as sole proprietors on a separate Schedule C (Form 1040) or Schedule F (Form 1040). Each spouse must also file a separate Schedule SE (Form 1040) to pay self-employment taxes, as applicable. See the Instructions for Form 1040-SS for American Samoa, Guam, the CNMI, the USVI, and Puerto Rico.

Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally don’t need an EIN. If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse’s sole proprietorship. Generally, filing as a qualified joint venture won’t increase the spouses’ total tax owed on the joint income tax return. However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return.

If your spouse is your employee, not your partner, see One spouse employed by another in section 3. For more information on qualified joint ventures, go to IRS.gov/QJV .

Exception—community income.

If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. territory, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. You may still make an election to be taxed as a qualified joint venture instead of a partnership. See Exception—qualified joint venture , earlier, in this section.