You may not need to issue your wife a 1099, but you may need to change the way you file your tax returns. There's more to this issue than just a 1099.
According to IRS IRS
on Husband and Wife Business , "a spouse is considered an employee if there is an employer/employee type
of relationship, i.e., the first spouse substantially controls the
business in terms of management decisions and the second spouse is under
the direction and control of the first spouse. If such a relationship
exists, then the second spouse is an employee subject to income tax and
FICA (Social Security and Medicare) withholding. However, if the second
spouse has an equal say in the affairs of the business, provides
substantially equal services to the business, and contributes capital to
the business, then a partnership type of relationship exists and the
business's income should be reported on Form 1065, U.S. Return of Partnership Income.
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 husband and wife 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 husband and wife, (2) both
spouses materially participate in the trade or business, and (3) both
spouses elect to have the provision apply.
Under the provision, a qualified joint venture conducted by a husband
and wife 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 Husband and Wife Unincorporated Businesses.
