COMMUNITY PROPERTY INCOME NOT SHARED FOR SELF-EMPLOYMENT TAX PURPOSES

A recent Tax Court case illustrates a trap for the unwary in regard to the computation of self-employment taxes.

Spouses subject to community property laws obtain an interest in the assets and income of their spouses. Unlike what one might expect, this “sharing” does not apply, however, in regard to self-employment tax computations.

Self-employment taxes are based on net earnings from self-employment. Code §6017 expressly provides that for a husband and wife filing a joint return, the income is not aggregated for purposes of computing the tax, but computed separately.  That section is silent as to community property income. However, Code § 1402(a)(5) specifically addresses community income in defining net earnings – the general rule is that income and deductions will be attributed to the spouse carrying on the trade or business (but it will be shared if the spouses jointly carry on the business).

In the case, the wife tried to use the losses from the husband’s accounting practice to offset the income from her realty business for self-employment tax purposes. The Tax Court did not allow it, based on the foregoing provisions.

Donald and Brenda Fitch, TC Memo 2013-244