Small business team

How to Run a Business With Your Spouse

Very often, owning a business involves your significant other.  I don’t just mean the moral support he or she provides, the countless hours spent listening to your plan in the early days, your problems as you carry it out, and the ongoing day-to-day trials and tribulations that come with owning your own business.  All that will never go away, and you’ll always need a good sounding board to keep you sane.

What is a Partnership?

I’m actually talking about a partnership here, where both spouses participate and share in the running of the business, as well as the profit or loss that results. That’s actually called a partnership, and it means you share as equals everything about the business. No formal agreement is necessary, it’s just how you view your business, what’s expected of each partner, and how you have decided between you to run things.  Sometimes partners contribute in different ways: maybe one has all the money but the other one does all the work.  Seems like a match made in heaven but if you have any experience in this type of thing it’s actually a hellish arrangement further down the line.  Lots of resentment and such, but that’s another topic!

A partnership is a business relationship that’s not a corporation but not a sole proprietorship either.  Unlike a corporation, a partnership doesn’t pay income tax but rather passes through it’s profit or loss to the partners.  The partners will include income from the partnership on their 1040 tax returns.

What is a Qualified Joint Venture?

If your partnership is husband and wife, and you like to file your taxes with the status of Married Filing Jointly, then you can become a Qualified Joint Venture if you want.  If you do this, you won’t have to file IRS Form 1065.  Just one less IRS tax form to file is reason enough to elect to become a Qualified Joint Venture.

Filing Taxes for Partnerships: IRS Form 1065

As partners, one thing you’ll have to learn to do is file IRS Form 1065.  That’s the tax return of a partnership.  It’s structured like any other federal income tax return: income first, then deductions, a few Schedules and you’re done.  If you keep good records this won’t be a big hassle to fill out and submit.

Here’s a link to IRS Form 1065 on the IRS website…the only place you should be getting tax forms.

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Tax Form Filling

Want to Declare Business Expenses? Get Your W9s Up Front

If you pay contractors to do lawn work for your home, you may or may not be interested in submitting 1099s for them at tax time.  Yes you are supposed to if you pay someone more than $600 throughout the year.  However, many people don’t even know this, many forget, and some simply just don’t know the rules or have them completely wrong.  C’est la vie.

If you own a business, on the other hand, it’s stupid not to 1099 your contractors.  After all, it’s a business expense, dummy!  The more expenses you have, the less profit, meaning the less taxes your business pays.  The key to everything is IRS Form W-9…if you don’t get your contractors to fill out the W9 then it’s kinda hard to report to the IRS a business expense with no Tax Identification Number.

The way to make sure you get to declare all the business expenses you deserve is to get your contractors to fill out the W-9 Form before they start work for you.  That way, it’s rather like saying…

you can’t work for me unless you fill out IRS Form W-9 first…

Then, when it comes time to issue 1099s, you’ve already go their tax ID number and you’re good to go.  Otherwise, you’ll be trying to fill out tax forms and you’ll have to stop everything and try and find those contractors, and say “hey I’m a lame business owner and i never got your tax id…can I have it now so you can pay more taxes and i can get one more business expense on my tax return?”

No way is that going to be easy or fast.  Good luck finding that random phone number of the guy you hired eight months ago to paint your office.  Then have a good time waiting a week for him to get back to you.  Then enjoy yourself more when you try and email the W9 form to him and he never responds.  And if he does respond, your tax deadline has long since come and gone!

So that’s why please please please have your contractors for your business fill out the IRS Form W-9 as a condition for working for you.  Here’s where you can find a copy of the form…on the IRS website, the only place you should ever get tax forms.

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contractors

Write that Check, Pay that Guy…But Don’t Forget to tell the IRS!

If you paid someone over $600 this year for any service, then you have to issue an IRS Form 1099 or the IRS will be angry with you.  No, just kidding about the angry part.  But you are actually supposed to report to the IRS any contract work you paid for in excess of $600 over the course of the tax year.  And if you’re a business then you really should report it so you can claim it as a business expense.

IRS Form 1099 is used to report to the IRS any contract work you had done, to whom, and how much for the year.  So let’s say that you hired the same guy eight times from February to November to fix your toilets in your store.   Each time it was $100.  The total amount is $800, which is well over the threshold amount for having to report contract work ($600).  You would issue one IRS Form 1099 in the amount of $800 rather than eight separate 1099s for $100 each.  Seems kinda silly to have to spell that out with the IRS and taxes it’s nice to be absolutely sure you’re understanding everything, right?

Now, it’s not going to change anything for you except that you will get to claim $800 more in business expenses.  That’s a good thing because it means you’ll be paying less taxes.  So, it behooves you to issue 1099s.  It doesn’t benefit the other guy at all.  In fact, he’ll probably want to avoid getting that 1099 because he’ll have to pay income taxes on that money he received from you.  After all, it was straight profit for him…you didn’t take any money out of his pay to send to the IRS to cover Social Security and Medicare taxes, did you?  No, I think not!  So nobody gets to make pure income without the tax man getting involved.  IRS Form 1099 is how the IRS ensures that contractors pay their fair share.

Your tax prep software will be able to issue electronic 1099 forms for you, for submission to the IRS.  You can then print paper copies for the service provider or contractor, so he or she can prepare his or her own taxes.  The IRS will not accept paper copes of 1099 forms from your printer.  They must be ordered from the IRS or submitted electronically.

Here’s more info on the 1099-MISC, the most common type used for paying contractors and other service providers for whom you did not issue a W2.

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Lady

Why I Love Paying FUTA

Don’t get me wrong- I hate paying taxes.   But when it comes to paying federal unemployment tax (FUTA), I’m just giddy.  There are actually three reasons for my tax joy:

  1. The form for filing FUTA (IRS Form 940) is wonderfully simple.
  2. FUTA tax rates are pretty low.
  3. When I’m figuring and filing IRS Form 940, it means I’m almost done with tax returns for the year.

You see, once I’m at the state where I’m ready to fill out IRS Form 940, I’ve done all the hard work already.  Line 3 asks for the

Total Payments to all employees…

Well if I know that, I’ve already done my huge income tax for for the two corporations I manage… that’s filling out two entire 1102S forms for the S Corporations I take care of.  Now that’s a hateful form!  But the 940?  Piece of cake!  Maybe now you get why I love paying FUTA.

IRS Form 940 is SIMPLE to Understand

It’s easy as pie, since we’re talking sweets here.  It’s easy, especially if your business doesn’t pay any fringe benefits or get involved in dependent care, health insurance, or group life insurance.  If all you do is pay people a straight wage, then IRS Form 940 will take you all of five minutes to complete.

The one thing that can make the 940 a little hard to understand is if you live in what the IRS cryptically calls a credit-reduction state.  This is basically a state that owes the Feds money.  The feds get their money back by taking it from taxpayers in that state.  More specifically, employers in credit reduction states will pay the IRS higher FUTA than normal.  It’s in the form of a smaller credit, rather than an added tax.    This is actually quite simple to enter on your IRS Form 940, not hard at all.  If you want to know more about credit reduction states, here’s the IRS page on their website that explains in detail how it works.

Take a look: IRS Form 940 is a simple joy to fill out and submit.  Download it from only one source: the IRS website.  Happy FUTA!

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Senior man standing outside house

A Little-Known Secret About Family Treasures & Taxes : IRS publication 544

You’re good at cleaning out the house and making a buck doing it.  You are the Yard Sale Queen or King.  While you may see cash where others see beloved possessions, you know that sometimes there are some real treasures hidden away in Aunt Dottie’s attic. That can mean some true cash…ever seen “Antiques Roadshow”?  People bring in old things from their homes and find out they’re worth thousands of dollars.

Treasures are Taxable

When it comes to selling your treasures for a profit, it isn’t as simple as you always thought.  For example, did you know that you’re supposed to report capital gains and pay income tax to the IRS when you file your return?  Yup, the IRS wants its share of the spoils, even when you sell your Aunt Dottie’s prize collection of rooster-themed salt and pepper shakers..if you turned a profit, that is.

Your Old Junk Isn’t

But when you sell your old things at a garage sale to make a few bucks, that is not considered capital gains because you are selling it for less than what you paid.  Yes, you’re making some money but if you consider your garage sale items like investments, you’re losing hand over fist!

It’s only when something appreciates in value that you are making money and the IRS gets involved.  IRS publication 544 explains this in detail, so you know the difference between un-taxable garage sale money you make, and taxable collector’s item sale on which you made a mint.

Other Tidbits You’ll Find in Pub 544

Basically this publication covers any money you receive that’s not from a job or an investment.  When you sell real estate (your home) or securities, or trade for them, or exchange property for stock, or sell a business, renew a franchise or other sales of assets, Publication 544 spells it all out for you.  Cutting some timber on your land?  The IRS wants their share of the profit.  Selling your childhood stamp collection?  You can’t profit without sharing with the IRS, unfortunately.  All this and more, in 42 pages of Pub 544.