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FAQ

 01  Question: Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?

 

Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:

  • The only members in the joint venture are a husband and wife who file a joint tax return,

  • The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),

  • The husband and wife must each materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and

  • Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return, by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, Schedule F (Form 1040), Profit of Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax, to pay self-employment tax.

The qualified joint venture rules are effective for taxable years beginning after December 31, 2006. For more information, seeElection for Husband and Wife Unincorporated Businesses.

Husband and wife businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69 and the Instructions for Schedule C.

 

 02   Question: What is the difference between a Form W-2 and a Form 1099-MISC?Answer:

Although both of these forms are called information returns, they serve different functions.

Employers use Form W-2, Wage and Tax Statement, to:

  • Report wages, tips, and other compensation paid to an employee.

  • Report the employee's income and social security taxes withheld, and other information.

  • Report wage and withholding information to the employee and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

Payers use Form 1099-MISC, Miscellaneous Income, to:

  • Report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.

  • Report payments of $10 or more in gross royalties or $600 or more in rents or compensation. Report payment information to the IRS and the person or business that received the payment.

     

 03  Question: I retired last year, and started receiving social security payments. Do I have to pay taxes on my social security benefits?
 

Answer:

Social security benefits include monthly retirement, survivor and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable. The amount of social security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:

  • One-half of your benefits.

  • All of your other income, including tax-exempt interest.

The base amount for your filing status is:

  • $25,000 if you are single, head of household, or qualifying widow(er),

  • $25,000 if you are married filing separately and lived apart from your spouse for the entire year,

  • $32,000 if you are married filing jointly,

  • $0 if you are married filing separately and lived with your spouse at any time during the tax year.

If you are married and file a joint return, you and your spouse must combine your incomes and social security benefits when figuring the taxable portion of your benefits. Even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring on a joint return if any of your benefits are taxable.

You can figure the taxable amount of the benefits on a worksheet in the Instructions for Form 1040, Instructions for Form 1040A, or in Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

 

 04  Question: Can I receive a tax refund if I am currently making payments under an installment agreement or payment plan for a prior year's federal taxes?

Answer:

Generally, no. A condition of your installment agreement is that the IRS will automatically apply any refund due to you against taxes you owe. If your refund exceeds your total balance due on all outstanding liabilities including accruals, you will receive a refund of the amount over and above what you owe.

  • Because your refund is not applied toward your regular monthly payment, you must continue making your installment agreement payments as scheduled and in full until your liability including accruing penalty and interest is paid in full.

  • Regardless whether you are participating in an installment agreement or other payment arrangement with the IRS, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. For more information on these non-IRS refund offsets, you can call the Bureau of the Fiscal Service (BFS) at 800-304-3107 (toll-free)

 

 05 Question: If I claim my child who is a full-time college student as a dependent, can she claim her own personal exemption when she files her return?

Answer:

If you can claim an exemption for your daughter as a dependent on your income tax return, she cannot claim her own personal exemption on her income tax return. Your daughter should check the box on her return indicating that someone else can claim her as a dependent.