A lot of businesses are family operations. When you need some extra help, the first people you look to are often the ones you know and trust more than anyone else. Or if you’re just starting a business, opening it with a loved one can make the adventure more comfortable and exciting than going about it all on your own.
One of the most common types of family operations is the husband and wife business. Married couples are truly partners in life and teaming up to make a living together can make a lot of sense.
While marriage is a partnership, business operations aren’t always as cut and dry. If you’ve been running a business on your own and your spouse starts helping out, they’re most likely an employee. But if you both launched your business together, there is a good chance you’re co-owners. There are differences between these two situations from a tax perspective so it’s important to be clear which applies to you and your spouse.
One spouse is the owner and the other is an employee
If one spouse runs the business on their own and hires the other to help out, the tax situation is pretty straightforward. The spouse that works for the other is an employee and subject to income tax withholding and taxes for Social Security and Medicare.
Your business is considered a partnership if you and your spouse run it together and started it using shared finances or contributed equally to its launch.
Married couples that run a business together are often able to qualify as a joint venture instead of as a partnership for tax purposes. This means that each spouse files as a sole proprietor of the business and separately reports their share of the business’s income, gains/losses, deductions and credits on their own Schedule C form.
The main benefit of filing as a joint venture is both spouses receive credit for Social Security and Medicare. The Schedule C form only has one Social Security Number field, so the spouse that completes the form often gets credited for these benefits and the other does not. Filing as a joint venture means that both spouses complete a Schedule C, avoiding this problem.
In order to qualify as a joint venture, you and your spouse must “materially participate” in the business, be the only two partners of the business, file a joint tax return, and both elect to be a joint venture.
Working with your spouse has a lot of benefits. You get to be business partners with your life partner and earn a living together. Just makes sure you clearly define if they’re an employee or co-owner so you avoid any tax issues.