Keeping business income separate from personal income can be tricky. If you file taxes as an individual, you need to be careful how you report the income from your business. If you file taxes jointly, things become even trickier. Since most married couples have joint incomes that are well above their personal thresholds for qualifying for the K-1 Filing status, with one exception: business income from a sole proprietorship or S-Corp.
These types of businesses are setup so that the owner is both the employee and the owner of their own company. This means that if both spouses own an S-Corp or Sole Proprietorship together, then both will need to file at least one set of personal and business taxes separately in order to avoid triggering a negative tax consequence. Let’s take a look at how you can keep your small business earnings separate from your personal income and save some money on your taxes in the long run…
Why file as Sole Proprietorship or S-Corp?
A sole proprietorship or S-Corp is a type of business that is owned by one person. If you own a business that is structured as a sole proprietorship or S-Corp, then you will have to file your business taxes on a separate schedule from your personal taxes. This creates an opportunity to hide your business income from your personal taxes. You can do this by taking a couple of simple steps… You may want to consider using a sole proprietorship or S-Corp to structure your business if the following conditions apply to you:
- You have business expenses that you want to deduct from your personal income.
- You want to keep your business income separate from your personal income. A sole proprietorship or S-Corp provides a legal barrier between your personal and business finances. This barrier can make it easier to separate the two. Having business expenses on your personal taxes might not sound great at first. But you can use these deductions to reduce the amount of income tax you pay on your personal taxes. This will save you money in the long run. There are a couple of downsides to structuring your business as a sole proprietorship or S-Corp. These are:
- You will have to report your business income on your personal taxes. This can increase your overall tax liability.
- You will have to pay Social Security and Medicare taxes on your business earnings.
What is a K-1?
If you report business income on your personal taxes, you will get a 1099-MISC form at the end of the year. Reporting business income on your personal taxes, you will get a 1099-MISC form at the end of the year. If your business is structured as a sole proprietorship or S-Corp, then you will also get a K-1 form. The K-1 form tells you how much you owe in taxes on your business income. If you file a joint return, then you will have to decide who will report the business income. One spouse can report the income from both businesses. The other spouse can report none of the income from either business. If you report one business and not the other, then you will trigger a negative tax consequence.
How to hide small business income
If you report both businesses, then you will trigger the alternative minimum tax (AMT). The AMT is a special tax designed to ensure that taxpayers with large deductions pay a reasonable amount of tax. The AMT is triggered when you claim too many deductions. You might be tempted to report all of the income from both businesses on your spouse’s return. This is a mistake, though. It is the equivalent of stealing from your future self. Here’s why:
You will have to pay interest and penalties on the amount you owe if you underpay your taxes. – This could damage your credit score.
You could even be charged with tax evasion. When you underreport your income, the government has no way to verify that you are paying the correct amount of taxes on your income. Instead of trying to hide your income, you should consider reporting it on a separate schedule from your spouse’s income. This will trigger the AMT, but at least you will be paying the correct amount of tax.
Joint Tax Returns: The Exception
If you are married and file jointly, it can be tempting to report all of the business income on your joint return. This can be a mistake, though. You will have to pay interest and penalties on the amount you owe if you underreport your taxes. You could even be charged with tax evasion. Instead of reporting all of the income on your joint return, you should consider reporting some of it on a separate schedule from your spouse’s income. This will trigger the AMT, but at least you will be paying the correct amount of tax. You can report some of the business income on a separate schedule from your spouse’s income. You can do this by having the spouse who owns the business sign a Form 1040-S. This is a special schedule for sole proprietors.
Conclusion
Keeping business income separate from your personal income can be tricky. If you report both businesses on your joint return, then you could trigger the alternative minimum tax (AMT). Instead of trying to hide your income, you should consider reporting it on a separate schedule from your spouse’s income. This will trigger the AMT, but at least you will be paying the correct amount of tax.