Since 2007, the IRS has given husbands and wives, filing a joint tax return, the opportunity to treat their business venture like a jointly owned sole proprietorship. This election is only available to “qualified joint ventures” exclusive to husband and wife-only members provided that both parties materially participate in the trade or business and of course, file a joint tax return. (See IRS.gov Small Business/Self-Employed)
This has several advantages over treating the business as a partnership, the first of which is the reduction in paperwork and record keeping.
Taxes and record keeping requirements are less stringent.
Operating in this manner allows the principals to attend to the business and its needs first and foremost rather than worrying about keeping records that are more detailed for a partnership. A 1040 return is simple and besides that, each spouse has to fill out separate Schedule C returns according to their pre-determined ownership stakes.
This avoids the hassle of having both spouses fill out partnership returns and keeps everything organized and clean.
Both spouses can get credit for social security taxes and Medicare coverage.
Self-employment taxes can often drag a husband and wife business down, but a big advantage is that both spouses can get credit for paying social security and Medicare taxes without paying more in taxes.
If one spouse has an outside job, that spouse can get credit for taxes withheld and therefore, the burden of all the payroll tax isn’t shouldered by the other spouse. This husband and wife-business election can be beneficial as long as both spouses do actually participate in the operation of the business.
No need to pay for creating an LLC or even for an EIN.
When you start a business with your spouse, you do not need to incorporate it or form an LLC. You will be able to deduct all your expenses on a Schedule C and do not have to worry about the cost of incorporating (LLC) or the extra paperwork of filing for an Employer Identification Number (EIN). Your social security numbers will do just fine and there is no need to go out of your way to register with the Federal Government any further.
In most cases, registering with your state will be required especially if you need a re-sale number and want to sell products that will be subject to sales tax.
Some rules to keep in mind.
- A partnership terminates at the end of the tax year and any change in election should be revised at that time.
- A business already set up a Limited Liability Company does not qualify for the election.
- If the business was set up as a partnership, with an EIN, the EIN must remain with the partnership and should not be used on the return once a husband-wife business election is made.
- If employment taxes are paid, at least one spouse needs a “sole-proprietorship” EIN.
- Each partner must file a Schedule C on their joint return for the election to be valid.
Operating as a husband and wife unincorporated business has many advantages beyond the scope of this article. The ease of operation, reduction of paperwork and simplicity of tax returns alone should make this election valuable for any spouses starting a small business together.