@emh1969
I see two basic options.
1. You file a joint return with your wife. Then, it doesn’t matter that the PayPal account is attached to your Social Security number. You would include a schedule C for the business in your wife’s name, reporting the gross income, and deducting any legitimate expenses, and paying income tax and self-employment tax on the net profits. On a joint return, you will have to include all of your wife’s worldwide income including her non-US income. You can claim a credit or deduction for foreign income tax is that she pays on the same earnings. To file a joint return, you would have to apply for an ITIN for your wife. This requires that you mail the IRS a form W-7 ITIN application along with proof of identity as required in the instructions. You would mail the W-7, the proof of identity documents, and the completed tax return all to the address used for the W-7. After an ITIN is issued, the IRS will process the tax return. Because the W-7 and tax return will require your wife’s actual signature on paper, and you must gather identity documents, this may require a trip to your home country or the use of an express service.
2. The alternative is to take the position that this is not your income because it is not your business. If you don’t file a joint return with your wife, you must file as married filing separately, you are not allowed to file as single. If your wife does not have an ITIN, you won’t be able to file your return electronically, you will have to print it and mail it in. Leave the space for your wife’s tax number blank and when you get the print out, write “NRA“ in the space for her tax number, meaning non-resident alien. You will also attach a copy of the 1099-K form and a letter of explanation, in which you will explain that this was your wife’s income for your wife’s business and that she will report the income on her tax return. Meanwhile, your wife will file a nonresident tax return form 1040-NR. She must report her US sourced income and pay tax on it just as if she was an American citizen. TurboTax does not support form 1040-NR, you will have to find another software provider.
Now, you have never specified what your wife does to get money from PayPal. It may or may not be US-source income, or it may only be partly US-sourced income. You can review this IRS chart.
https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-source-of-income
It may be a viable option for you to report a PayPal business on schedule C and then report the entire gross proceeds as pass-through income to your subcontractor. However, because your wife is a non-resident alien, you as the payer of the pass-through income would usually be required to withhold taxes and pay those to the IRS, to your wife’s account. If your wife does not file a US tax return, the IRS gets to keep this “backup withholding”. If your wife does file a US tax return, the taxes that you withheld will go to her credit and she will either owe additional taxes or get a refund depending on the rest of her tax return. You may be subjected to substantial penalties for not taking backup withholding.
I would definitely recommend having the entire situation reviewed by a professional before you do anything. (You may also be in violation of PayPal‘s terms of service, and this situation could be viewed as a tax avoidance scheme by the IRS since you are disguising the true recipient of the money. Especially if the amount is more than $10,000. That is a legal matter that I am not qualified to comment on, other than to suggest that it may be an additional problem for you as you work through your situation.)
