In Husband-Wife Partnerships: The Tax Angles—Part 1, we covered the basic tax angles affecting unincorporated husband-wife businesses that are classified as partnerships for federal tax purposes.
This article is devoted mainly to three tax strategies to reduce the brutal self-employment tax hit on a profitable husband-wife business that is currently operating as a partnership. If that is your situation, keep reading.
First, a look at the basics.
Husband-Wife Partnership Basics
Say you currently operate an unincorporated husband-wife business that is classified as a partnership for federal tax purposes.
You must file an annual Form 1065 (U.S. Return of Partnership Income) for the business.
You and your spouse each must be issued separate Schedules K-1 from the partnership. The Schedules K-1 allocate the partnership’s annual taxable income items, deductions, and credits between the two of you.
You then file your joint Form 1040 by combining the Schedule K-1 amounts for you and your spouse and mixing in non-business tax items (itemized deductions, personal tax credits, and so forth). No worries so far!
Note. Your husband-wife partnership may come from your husband-wife LLC that is treated as a partnership for federal tax purposes.
The Self-Employment Tax Problem
The self-employment tax is the government’s way of collecting Social Security and Medicare taxes from self-employed individuals, including spousal partners in husband-wife partnerships.
For 2020, the self-employment tax ... Log in to view full article.