turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Community property self-employment income reduction?

I have to subtract income from my self-employment income because of community property I had to award my ex from our divorce. However, turbotax will not allow me to enter a negative number under Uncommon Income. I don't want to report this as negative W2 income since it would not reduce my business net income. How do I report this negative self-employment income on Turborax?? As a business expense perhaps?

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

18 Replies

Community property self-employment income reduction?

I don't understand what you mean by:

 

"I have to subtract income from my self-employment income because of community property I had to award my ex from our divorce."  

 

Was your ex was awarded an ownership interest in your business?   If so, the business would have two owners and would be a partnership, not a sole proprietorship.

 

If married taxpayers in a community property state file married joint, the self-employment tax is paid by the spouse who earned it and 50% of the community net income is reported as a negative amount on Form 1040, Schedule 1, Line z as, for example, "Spouse's Community Interest in Schedule C Net Income."

Community property self-employment income reduction?

We’re divorced and I’m filing as HoH. He got money from me that is income I earned as a sole proprietor, not as a W2 salaried employee. He is responsible for his portion of taxes on this income per our settlement agreement.  How do I report a subtraction on my Schedule C?  

Community property self-employment income reduction?

Was the payment for services rendered to your business by your former spouse?   Did you issue a Form 1099-MISC to your former spouse for those services?   Why do you believe the cash paid under a divorce decree is a business expense deductible on your Schedule C?   A payment pursuant to a divorce decree is not necessarily tax-deductible under tax law.

 

Community property self-employment income reduction?

I don’t believe anything. Ex is responsible for taxes on this self-employment income per our settlement agreement and I will need to file my taxes accordingly.  So how do I reduce my self-employment income and taxes?  W-2 income is taxed differently so reporting it outside of a Schedule C seems incorrect. 

SusanY1
Expert Alumni

Community property self-employment income reduction?

A division of assets isn't tax-deductible to the person paying the assets or taxable to the recipient in most cases.

However, if your spouse was employed by you in your business, then you would list the expense as "contractor" expense.    

 

If your spouse didn't work in the business that you're tasked with paying him some portion of revenue from, he won't owe self-employment taxes, and you won't have a deductible expense.  This is true even if the divorce settlement agreement states otherwise. 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Community property self-employment income reduction?

If you are paying your former spouse for his 50% interest in community income earned by you while married, that reduces your taxable income but it does not reduce your self-employment income for purposes of calculating self-employment tax.   I previously explained how to report this on your individual income tax return.   Self-employment tax is paid by the taxpayer who earned the self-employment income.  You indicated that you earned the Schedule C income and, therefore, the self-employment tax is reported on your Form 1040.

 

See Internal Revenue Code Section 1402(a)(5)(A).

 

https://www.taxnotes.com/research/federal/usc26/1402?highlight=%221402%22

 

Emphasis added below.

 

"(5) if--

(A) any of the income derived from a trade or business (other than a trade or business carried on by a partnership) is community income under community property laws applicable to such income, the gross income and deductions attributable to such trade or business shall be treated as the gross income and deductions of the spouse carrying on such trade or business or, if such trade or business is jointly operated, treated as the gross income and deductions of each spouse on the basis of their respective distributive share of the gross income and deductions"

Community property self-employment income reduction?

You brought up a good point. It looks like it is appropriate for me to issue a 1099-MISC for that settlement (which were actually shares of RSUs).  It is a taxable settlement.

Community property self-employment income reduction?

Only a business has to file Forms 1099-MISC.   This was not a payment by a business.  

 

As far as I can tell, you were merely paying your former spouse his community share of your Schedule C net income earned by you while you were married.

 

His share of your Schedule C net income is taxable to him but, under Section 1402(a)(5) of the Internal Revenue Code, 100% of the self-employment tax is your liability.   You, of course, will also receive Social Security credit for 100% of the self-employment income, even though your former spouse pays tax on his 50% community interest in your Schedule C net income.

Community property self-employment income reduction?

I should have been more precise.   Your former spouse pays INCOME TAX on his 50% community interest in your Schedule C net income but does NOT pay any SELF-EMPLOYMENT TAX on that income under Internal Revenue Code Section 1402(a)(5).

Community property self-employment income reduction?

Well, our settlement agreement doesn't exactly state it was community property. It states that he is awarded a taxable asset... so I think a 1099-MISC is fair game and satisfies the IRS question of: At least $600 in:

  • Other income payments.

Community property self-employment income reduction?

If the issue isn't the division of community property income from your Schedule C (which was your original question I've already answered), I assume it is a transfer of an asset pursuant to a marital property settlement.   Such transfers are treated as gift under Internal Revenue Code Section 1041:

 

https://www.taxnotes.com/research/federal/usc26/1041?highlight=%221041%22

 

Such a transfer results in no immediate tax consequence.   There is a carryover of basis in the asset transferred.

 

I doubt that the divorce decree cited any authority for your/its position that your former spouse has taxable income and you are entitled to a tax deduction for the transfer of an asset incident to divorce.   You mentioned a specific asset (I'll have to look at your prior posting) but I haven't researched an exception to IRC Section 1041 with respect to that specific asset.

 

Section 1041:

 

(a) General rule. No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)--

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor's basis. In the case of any transfer of property described in subsection (a)--

(1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and

(2) the basis of the transferee in the property shall be the adjusted basis of the transferor.

 

 

 

 

Community property self-employment income reduction?

Thank you for this additional information. and for raising the issues. The transfer is specifically of RSUs that just vested this year (over two years after divorce).  The courts would have to characterize this income as community property in a trial because of the complexity of when these shares were granted and vested.  So, the characterization is actually not 100% clear. In any case, I negotiated transfer of these shares to him as part of an entire settlement agreement.

 

The vested shares normally require me to pay ordinary income tax and self-employment tax at vest. Our divorce decree does say he is fully responsible for any and all taxes on these vested shares that were transferred to him. 

 

I checked in turbotax and filing as negative Other Income vs a 1099 MISC income payment for my Schedule C is about a $500 tax hit to me.  

Community property self-employment income reduction?

As I mentioned, I noticed that you had referred to the transfer of a specific asset, but didn’t focus on that because I thought the discussion had move from the taxation of community income to the transfer of assets incident to divorce, which is governed by Internal Revenue Code Section 1401.

 

I assume that you received the Restricted Stock Units (RSUs) as compensation for services rendered to a corporation in your capacity as an independent contractor filing a Form 1040, Schedule C.   When the RSUs vested, you received (or will receive) a Form 1099-NEC from the corporation for the self-employment income, will include the ordinary income from vesting in your 2023 Schedule C and received the related shares.

Transferring an asset “incident to divorce” – which results in no income to the recipient spouse and no deduction to the paying spouse - is not an issue.   Your transfer to your former spouse of 50% of shares received on the vesting of the RSUs would qualify as “incident to divorce” because it is “related to the cessation of marriage.”   See Reg. Sec. 1.1041-1T(b) Q&A 7:

 

“A transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2), and the transfer occurs not more than 6 years after the date on which the marriage ceases.”

 

The issue is whether or not, in your case, the income resulting from the vesting of the RSUs qualified as community income.   Assuming that the income from the vesting of the RSUs qualifies as community income, Internal Revenue Code Section 1402(a)(5) is clear that you are liable for 100% of the self-employment tax even though your former spouse is liable for 50% of the income tax on that income.   A divorce decree drafted under state law does not override the Internal Revenue Code.   Federal law preempts state law (Supremacy Clause: U.S. Constitution, Article VI, Paragraph 2).

 

If your former spouse rendered no services to your Schedule C business, there is no basis for treating the transfer of shares to your former spouse as independent contractor compensation deductible on your Schedule C.  

 

The income arose over two years after the divorce.   IRS Publication 555 (“Community Property”) refers to “income received” during marriage.   However, an article on a law firm’s website indicated that, in the case of deferred compensation, it’s when the income is earned that governs.   Apparently, RSUs may or may not be “deferred compensation” depending on the terms of the RSU plan, but I didn’t research that issue.

 

Interpreting community property laws is outside the scope of a CPA’s practice.   As a CPA, I can only tell you the tax consequences once a lawyer has determined the extent (if any) to which the income is community income.   In the case of community income, self-employment tax is governed by Internal Revenue Code Section 1402(a)(5).   A transfer of assets is governed by Section 1041.

Community property self-employment income reduction?

Although the divorce decree doesn't override the Internal Revenue Code, the "all taxes" language in the divorce decree might enable you to obtain reimbursement from your former spouse for the self-employment tax you paid on his 50% share of the income.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies