My husband established a new single member LLC in 2019. I assist him in the business. 50% of income needs to be allocated to him and 50% to me. Does this happen via 1099? Does the LLC issue 1099s to us as employees? How do those get filed? Then do we each file our own separate Schedule Cs?
here's what the IRS says.
One spouse employed by another
If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax. For more information, refer to Publication 15, Circular E, Employer Tax Guide.
Both spouses carrying on the trade or business
On May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.
The provision generally permits a qualified joint venture whose only members are a married couple filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a married couple who file a joint tax return, (2) both spouses materially participate in the trade or business, (3) both spouses elect to have the provision apply, and the business is co-owned by both spouses and (4) isn't held in the name of a state law entity such as a partnership or limited liability company (LLC).
Under the provision, a qualified joint venture conducted by a married couple who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).
This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation. Refer to Publication 334, Tax Guide for Small Business, for further information about self-employment taxes. For more information on qualified joint ventures, refer to Election for Married Couples Unincorporated Businesses.
so if you are an employee, you do not get a 1099, but a w-2. you spouse faces substantial penalties for failure to timely file and pay in taxes for the required payroll tax returns.
better would be to file as a partnership (form 1065) if both of you materially participate. no payroll tax returns. you will need TT business software to prepare the return. Only available for windows computers
the software will prepare the required K-1's, the info of which must then be entered in your joint return
the 1065 return is due 3/15/2020.
I strongly recommend that you discuss your situation with a tax professional. there are probably other significant issues that would affect your business and personal returns that you are unaware of. .
I assume you two are filing a joint return. As you know, a single member LLC can only have one owner. That means either you are a W-2 employee of the business, or a sub-contractor of the business. As a sub-contractor, that means that "YOU" are self employed with your own one-owner business that would probably be considered a sole-proprietorship.
As this point, declaring you a W-2 employee of your husband's business will open him up to all kinds of fines and penalties for not having paid the IRS (and state if applicable) quarterly tax payments of your W-2 with holdings.
If he issues you a 1099-MISC then as far as the IRS is concerned, you earned that income while self-employed and in business for yourself, with a completely separate business from your husband. Then, depending on the earnings of "your" business, you may be assessed fines and penalties for not having made quarterly tax payments. So you lose either way.
I would suggest that for 2019 you leave well enough alone and just let hubby claim all the business income on his SCH C. Then for 2020 he needs to actually hire you as a W-2 employee. That means he will be required to pay you as such and to withhold taxes from each of your paychecks as required by law. This includes state taxes too if your state taxes personal income, as well as U.C. taxes.
Then depending on the amount of money involved, he will be required to file form 940 either monthly or quarterly with the IRS to send the taxes he withheld from each of your paychecks, to the IRS. Again, if your state taxes personal income he'll need to do the same for the state too, using whatever forms and method of payment the state requires.
As you can see, this can get complicated very fast. So best to leave well enough alone. Besides, if you're filing a joint return, spliting the business income with you will have absolutely no impact on the overall tax liability anyway. You're just creating unnecessary paperwork that will significantly increase the probability of human error.
If you and your husband happen to reside and operate the business in a community property state (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin), then there is another option.
If you each own the business (the LLC) as community property, there are no other owners, and the LLC is not treated as a corporation for federal income tax purposes, then you and your husband have the option to treat the LLC as a disregarded entity and each file your own Schedule C.
See Rev. Proc. 2002-69: https://www.irs.gov/pub/irs-drop/rp-02-69.pdf
Frankly, you should see absolutely consult a tax professional concerning your situation.
For clarity, if the SM LLC did hire his wife as an employee, when he files the Form 940, are those wages exempt from the tax?