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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Trying to minimize SE tax (social security) and we are at 200k

Customer Question

Trying to minimize SE tax (social security) and we are at 200k of self employment income so the 107k cap is important to us but we need health insurance so we are looking at forming a general partnership to qualify for health insurance.

But the question is if we form a general partnership and we go with Revenue Procedure 2002-69 can we continue to file 1 schedule C and 1 schedule SE so that we can only be taxed on the 1st 107k for SE tax. My concern is having to split the income across both husband and wife and therefore all 200k income gets taxed for SE.
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!
If you run a family business - you do not need to form a general partnership.
Please be aware that the Small Business and Work Opportunity Tax Act of 2007 affects changes to the treatment of qualified joint ventures of married couples not treated as partnerships. 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).

LEV :

Please be aware that you are not required to split income equally - but in accordance with your respective interests in the venture - which is based on agreement between you. While for income tax purposes income is divided equally because you are in a community property state - for self-employment tax purposes it is divided based on your respective interests in the venture.

In your earning level - I would recommend to create an LLC and select S-corporation treatment for income tax purposes.

In this case - you will be an employee of the S-corporation and should receive reasonable wages which are reported on the W-2 form. The S-corporation should file its own tax return and deduct wages paid to you as business expenses. While S-corporation files its own tax return – any income tax liability is passed to shareholders and reported to you on the schedule K-1.

Because that distributions are not subject of self-employment taxes - there is a potential tax saving on self-employment taxes.
Please be aware of additional overhead and California franchise tax when you estimate your potential tax saving.

Let me know if you need any help.

Customer :

I disagree. Again we are doing this to qualify for group health insurance. So I either employ my spouse, form a corp or a partnership. As a general partnership I do not believe I am subject to additional California taxation. Under an SCorp their is additional state tax. But when I form a general partnership I do not understand how it impact my current filing as a sole prioprietor for tax purposes.

Customer :

Again my hope is that my general partnership will not impact my filing and continue to allow me to file the business as a sole proprietor for tax purposes and not split the income on the schedule C between both parties. I am currently put all income under 1 person which avoids the extra SE tax.

LEV :

I am not clear what exactly you disagree with?
You are correct - there is no additional California taxation for partnerships - that was not argued. However, if you form a partnership - you would be required to file a partnership tax return and should issue K-1 form to each partner - which will go to the schedule E of your tax return. You will not file the business as a sole proprietor for tax purposes in case of partnership.
You may however divide partnership interests - for instance - as 99% and 1% - you are not required to divide it equally.

Customer :

I am trying to figure out the best configuration for our business to pay the least tax assuming 200k profit and with two people (husband and wife). I think an SCorp hits me with more tax so if I did go general partnership you are saying I could not make them equal because each partner would be subject to the 100k SE tax limit seperately? Is that better then an SCorp then under these assumptions?

LEV :

If you want to treat your business as a general partnership - The partnership should file a tax return - form 1065 - and issue schedule K-1 to each partner. When partnership income is divided between partners - it should be divided in accordance with partners' respective interests in the venture - it might be divided equally or in any other proportion - as long as you both agree.
At the same time - a qualified joint venture whose only members are a husband and wife filing a joint return could not to be treated as a partnership for Federal tax purposes. You may simply divide income and expenses according with each of you respective interests in the venture - and each spouse would account for his or her respective share on the appropriate form, such as Schedule C and schedule SE.
Again - either way - you are not required to divide income equally - but according with each of you respective interests in the venture - whatever these shares are.
In case of S-corporation - you will receive a reasonable wage - which will be a subject of FICA taxes - equivalent of self-employment taxes - and the rest of income will not be subject of self-employment taxes.
For instance - if reasonable wages in your profession are $50,000 - that will be your wages and you only that amount will be subject of FICA taxes.
You may estimate tax liability each way and compare.

Expert:  Lev replied 3 years ago.
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Lev
Lev
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Taxes, Immigration, Labor Relations