1040 Communal State: Husband and Wife work together.

[Alex012]

Objective:

How can the wife pay me so we can file jointly?

Situation:

The wife and I work together. We live in Texas which is consider a community property state. We are working under a LLC which the wife and I created and we are the only members on it.

We use “Square” as our merchant processor. They only give out one 1099-K and it’s under the wife social. We never updated to the business EIN. (1) Should we updated her social on square to the business ein for the following years like that it is easier to split the income?

I never thought it was going to be this complicated but how can we file taxes together? We have always filed joint except this this year we started to work together.

I have read that we can use separate schedule C and divide up the percentages. This seems like it’s the only likely option from what I have read. Her schedule C would have her social and it also has the ein that refers back to the business ein which is under the wife name.

If I were to create my schedule c using my social. (2) Would I use the business ein on my schedule C?  

Just as an example the wife could put she paid me xxx.xx/percent cash under the contract labor expense on her schedule C, even though we were working together as husband and wife. I didn't think at the time a 1099nec would have been necessary since it was husband and wife. (3) Would I report the cash received under my schedule C part I Income: 1a (Enter other gross receipts or sales not reported on a 1099nec…). received and put the business ein which is under the wife name?

My assumption of this is if my wife pays cash contract labor expense (me) using her business ein and on my schedule C it sees receiving cash from business by putting business ein it would equal out? Like I mention an assumption. 

Any advice would greatly be greatly appreciated I am not sure on how to proceed or any other advice. Thank you for your time. 

This is what I have been reading.

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

https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

[Vanessa A]

1) Yes.  Have square issue the 1099-K to the business

" I have read that we can use separate schedule C and divide up the percentages."  That is exactly how you do it

(2) Would I use the business ein on my schedule C? No.  Neither of you use the EIN on the Schedule C.  You will use your SSN only.  The EIN doesn't really go on your return at all when you are filing a Schedule C.  It would be used if you filed the 1065.  You only need ONE EIN and that is for the business. 

(3) Would I report the cash received under my schedule C part I Income: 1a (Enter other gross receipts or sales not reported on a 1099nec…). received and put the business ein which is under the wife name?  Yes, you would report your half of the cash on Schedule C part 1.  As you walk through the steps in TurboTax to enter the income, you will get to a spot where it asks about the income, here you will select Cash, 1099-K and then enter your share.  She can do the same thing.  Your wife would not list you as contract labor as you are not subcontracting with her you are her partner.  Also, since you are in a community property state, the income is split which means this SHOULD not cause an issue when you  both enter half on your returns. If the IRS would happen to question, just be sure to respond and let them know that it was split.  And then definitely get your EIN on all contracts from now on to make it simpler.  

Again, the EIN is NOT entered on your return at all. The EIN belongs to the business/partnership.  

Community income1,2,3 is income from:
Community property;
Salaries, wages, or pay for services of you, your spouse (or your RDP), or both during your marriage (or registered domestic partnership) while domiciled in a community property state; and
Real estate that is treated as community property under the laws of the state where the property is located.

 

[Alex012]

Thank you, Vanessa It has great insight and understanding.

• 1)      I will contact them tomorrow to see what they say on the correction. I am on the presumption if we are changing the social to the ein of the business it will now acts as a general pot that we can now distribute proportions accordingly, because as of now everything is being allocated to the wife.

Example: By changing it to the business ein lets the business receives a 1099k for 10k. The wife will put the 1099-k as income with the business ein at 5k usd, and I will also do the same. Put the 1099-k at 5k usd using the business ein.

At the end the IRS would see that both 5k usd from both the wife and I add up to the total sum of business at 10k usd.  

FYI: The Ein for the business is under sole member under the wifes name. When the irs instructions were followed on the ss-4 it allocated like that because Texas is a communal state.

• 2).        By fill ein I meant on work schedule C Page 1: (A,B,C,F,E) Before Part 1

A: Principal Business or profession… FILL

B: Enter Code from instructions (Naics) FILL

C: Business Name FILL

D: Employer ID Number (EIN) LEAVE BLANK is this correct?

E: Business Address FILL

Assumption: If there is no EIN under line D on schedule C then the irs would know the income reported is based on the corrected 1099-k, and as you said the only reference regarding the business ein should by inputting the 1099-k as income. At the bottom I wrote the Instructions for IRS 1040 Line D, which I believe that you are basing it as leaving blank.

• 3).      Completely understand I am not a contractor anymore because square has reclassified 1099-k and we can file as a married couple in a communal state, now we can just split all expenses, and I can now see how by splitting schedule c expenses then how to transfers over to the Schedule SE which distributes the self-employment tax.

Final Question:

• 4).      We had two 1099-Nec that we sent out before Jan-31 and that was tied in with the business EIN. This shouldn’t affect the change of the 1099-k. My question to this is if we are dividing 50% on the expenses should I also divide those two 1099-Nec that came to do work for us?

• 5).       Not sure if some guidance can be given. Most expenses that qualified for section 179 were used. There were some things that we decided to depreciate over the years on form 4562. Would that something be something that we would split in half. Or can I just give all depreciations to the wife so that in that sence there is one piece of paperwork.

I really do appreciate it. It really does help clarify a lot.

IRS instructions Schedule 1040 (line D)

Line D Enter on line D the EIN that was issued to you on Form SS-4. Do not enter your SSN on this line. Do not enter another taxpayer's EIN (for example, from any Forms 1099-MISC that you received). If you do not have an EIN, leave line D blank. You need an EIN only if you have a qualified retirement plan or are required to file employment, excise, alcohol, to- bacco, or firearms returns, or are a payer of gambling winnings. If you need an EIN, see the Instructions for Form SS-4. Single-member LLCs.

If you are the sole owner of an LLC that is not treated as a separate entity for federal income tax purposes, enter on line D the EIN that was issued to the LLC (in the LLC's legal name) for a qualified retirement plan, to file employment, excise, alco-hol, tobacco, or firearms returns, or as a payer of gambling winnings. If you do not have such an EIN, leave line D blank.

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf