New LLC started this year; how do report income that my wife has earned under the new business if she is not a managing partner?

[Romeo2244]

Hello,

I started my own self managed LLC this year and started to deposit income my wife earned on behalf of the LLC into our business account. Do I need to do anything special with a true payroll system or somehow link her as an employee to the LLC using my EID ? 

Right now we have just been depositing the checks made out to both her AND directly to our LLC in that new business account. 

Is this the correct way to do this for tax purposes or do I need to submit a request for revision on my self managed LLC to make her a managing partner as well? We do married filing jointly for our taxes but this will be the first year we record income under the new business LLC. 

[AHelper]

Good day Romeo2244,

Congratulations on your new LLC! You have brought up quite a few items that we can cover one by one. As a general rule, you can find a ton of amazingly helpful information at the IRS Self-Employed Individuals Tax Center 

1. When you filed for your EIN and LLC you would have received an SS-4 notice from the IRS. On that notice it will tell you what type of return the IRS will be looking for tied to that EIN. Depending on how your LLC is structured you might see a 1065 for a partnership or an 1120 for a corporation.   Business Structures on the IRS can help explain some of the differences. You mention LLC and managing partner. 

2. Your wife sounds like she is a W-2 employee. Often both active managing members and employees will be on the payroll. There are many different ways to do payroll and using your EIN to report the payroll is ideal.  Video: Guide to Payroll Taxes

3. I am not sure I understand why you put both your wife's name and the business name on the checks. If they are her payroll checks they should go into a personal account not the business account. It is not a good idea to deposit individual payroll amounts into the business account.

If the checks are payments to the business for services rendered her name does not need to be on the checks at all.  Keeping business income and personal income is one of the key aspects of running a business and is often a challenge for new businesses. 

When you are starting or reorganizing a business there are many factors to take into consideration. Often the type of business you have, the number of employees you plan on having, and even the nature of the business can have an effect on your taxes.  

I hope this gets you in the right direction and I am happy to go into more detail if you have further questions.

[conniem123]

You do want to consider the qualified joint venture, which would allow you each to have credit for social security earnings on which retirement income is based.

If you classify your wife as an employee , she will earn retirement benefits through the payroll system.

Here is a great article as you consider both options.

https://www.irs.gov/businesses/small-businesses-self-employed/married-couples-in-business

Hope you find this information helpful!

[Romeo2244]

Thank you so much for the quick response. I did find the SS-4 which specifies this type of return :

A limited liability company (LLC) may file Form 8832, Entity Classification Election,
and elect to be classified as an association taxable as a corporation. If the LLC is
eligible to be treated as a corporation that meets certain tests and it will be electing S
corporation status, it must timely file Form 2553, Election by a Small Business
Corporation. The LLC will be treated as a corporation as of the effective date of the S
corporation election and does not need to file Form 8832.

HOWEVER, I should have clarified that my wife is commission only and is not W-2. She is an independent 1099 contractor. So last year when we filed we just did so for her being self employed and I am W-2 FTE. Now this year that we have the LLC I'm still unsure how to reflect her 'self employed' income under our newly formed LLC. The only reason we had her checks in her name was because that's how our client had been writing them for years. We got them to switch over to making them out to the LLC name the month or two after the LLC was formed. 

So if she is still 1099 can I report that income through our LLC if she is NOT a managing partner? Or should I revise the management structure to make her a managing partner? OR should I setup payroll and treat her as an employee of the LLC so that she can benefit from other government programs like PPP in the future should we need it?

[conniem123]

Her income can be reported on the Schedule C.  The client will issue a Form 1099NEC to the LLC and include all payments.

[AHelper]

That sounds like if you are a single member LLC then it would still end up on your Schedule C on your personal return. If it is not a single member LLC you need to discuss the legal and financial implications of being a corporation and filing a 1120 or if you should elect the 2553 and be treated as an S-corp for an 1120-s.

As far as the income for your LLC earned by your wife:

The income she earns on behalf of your LLC should not have her name on it. It should only be the LLC. 

She would then still be a schedule C and receive a 1099 from your LLC only for her commission earned.

There are a number of both legal and tax implications of changing the structure of your business, but that would be better handled by a legal professional. As you mention there are other items such as PPP to consider. There is a great reference on the Small Business IRS site that talks about  Married Couples in Business

[Romeo2244]

Okay thank you again. On the 1099s, she normally gets one from her client for her commissions throughout the year but this year will we get two, one for her as an individual and one for the LLC which is now how the checks are made out to her?

It seems redundant for the LLC to then generate a separate 1099 for her as well but if that's the suggested route we can do it. Does it matter that her name is in no way reflected on the LLC however she is the one performing the work to earn the commission (on behalf of the LLC)? 

[AHelper]

She might get a 1099 for separate work from the client that would be her personal Schedule C.

She then gets a 1099 for her commissioned work for the mutual client from the LLC since the income is the LLC income.

The LLC would get a single 1099 from the client for the LLC work.