Key takeaways
- A qualified joint venture is a tax election for married spouses who operate a business together.
- Couples benefit from a qualified joint venture by simplifying tax filing and ensuring both members buy into Social Security.
- Qualified joint venture filing can save paperwork during tax time but can create greater personal liability because it is only a tax designation and not a business entity.
Married couples running a business together previously had to file taxes as a partnership if they had not yet established a business structure. But the IRS now offers qualified joint ventures as a tax election to make filing easier for spouses that jointly operate a business.
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What is a qualified joint venture?
A qualified joint venture is a tax election made by a married couple who is jointly running a business. Since 2007, the IRS has allowed businesses owned solely by a married couple to avoid being classified as a partnership, and instead file as a sole proprietor on their joint tax return.
The election is an IRS designation only. The qualified joint venture isn’t a business structure (like a corporation or partnership) so it does not offer protections that a separate entity would.
Why the IRS created the qualified joint venture
Before qualified joint ventures were allowed, married couples that jointly owned a business often opted to be treated as a partnership. This treatment meant additional paperwork and filings were required, which cost time and money.
Some couples, to avoid the additional filing work, were acting as sole proprietors and filing a Schedule C with their tax return, and only recognizing that one spouse was self-employed. That meant that only one spouse would receive credit for Medicare and Social Security contributions.
The creation of the qualified joint venture option is considered a “common-sense” change to help taxpayers accurately report business income and eliminate unnecessary paperwork.
Qualified joint venture requirements
The IRS lays out criteria that must be met to file taxes as a qualified joint venture:
- The only owners of the business are a married couple that file a joint return.
- Both spouses materially participate in the business.
- Both spouses agree to be treated as a joint venture — and not a partnership.
If you meet those three basic criteria, you’re eligible to have your business treated as a qualified joint venture during tax time.
How do you file taxes as a qualified joint venture?
One of the major benefits of a qualified joint venture is the ability to file taxes easily by including this income on your 1040 tax return. Because the IRS treats a qualified joint venture as a sole proprietorship, each spouse will fill out a separate Schedule C, Profit or Loss from Business and Schedule SE, Self-Employment Tax. They’ll file these along with their 1040. How much each spouse puts on their Schedule C should be reflective of their interest in the business.
For example, if a couple earns $100,000 and they each have a 50% interest in the business, each person would report $50,000 in income on Schedule C. If they earn $100,000 but have a 70/30 interest in the business, one person would report income of $70,000 while the other reports income of $30,000. Deductions on Schedule C are treated the same way — split between the two Schedule C’s, reflective of each person’s interest in the business.
Pros and cons of a qualified joint venture
If you’re running a business with your spouse and the business isn’t structured as a partnership, LLC or corporation, there are benefits and drawbacks of filing as a qualified joint venture:
Pros
Ease of filing as you avoid additional paperwork that typically accompanies filing as a partnership.
Both spouses contribute to Social Security.
Cons
Personal liability because it is a tax designation and not a separate legal entity.
You may pay more in taxes than if you filed under another business structure due to self-employment tax.
Benefits of the qualified joint venture
Ease of filing. When you file as a partnership, there’s a lot of additional paperwork required, including an information return Form 1065 as well as providing each partner with a K-1, which details their share of income from the partnership. That income is then reported on the partner’s individual tax return.
With a qualified joint venture, there’s no need to file anything additional. You don’t file the additional return or K-1 with the partnership. Each person simply fills out a Schedule C and Schedule SE, which shows how much income they received and how much they paid in taxes.
Recognition of self-employment taxes paid. If you’re earning an income through self-employment, you’re required to pay self-employment taxes on that income using Schedule SE. When only one spouse reported self-employment income to avoid the paperwork that comes with a partnership, this meant that only one spouse would get the credit for the taxes paid. This impacts your future Social Security benefits.
Drawbacks of the qualified joint venture
Personal liability. A qualified joint venture is a tax designation — it allows married couples to file as sole proprietors in a jointly owned business. And being a sole proprietor comes with drawbacks. That means one of the biggest drawbacks is risk of personal liability. As a sole proprietor, your business isn’t a separate legal entity. That leaves you personally liable for any debts or legal issues that arise during the course of your business.
Pay more in taxes. Another drawback is that depending on how much you make, you may actually end up paying more in taxes than if you were to form another business structure, like a corporation. That’s because sole proprietors may sometimes pay more in self-employment tax, compared with owners of a corporation, who are able to be paid in a combination of salary and dividends.
Frequently Asked Questions
Can an LLC be considered a qualified joint venture?
Whether or not an LLC can be considered a qualified joint venture can be confusing because the answer varies by state. In general, if a married couple forms an LLC in a state that is not a community property state, they won’t be able to file taxes as a qualified joint venture. If they do live in a community property state — and meet all the other criteria for a qualified joint venture — they may sometimes be considered sole proprietors for tax purposes and file a Schedule C and Schedule SE.
Do I need an EIN to file as a qualified joint venture?
The IRS treats you as a sole proprietor if you opt to file as a qualified joint venture and sole proprietors are not required to have an EIN. Exceptions include if your sole proprietorship requires returns for excise, employment, alcohol, tobacco or firearms. If the business does have employees and is required to pay federal employment taxes, either spouse may report and pay the taxes due using their own sole proprietorship EIN.
How long does a qualified joint venture election last?
Once you choose to file taxes as a qualified joint venture, it remains in effect until you either fail to meet qualification requirements or the IRS revokes the status.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.
