Employing your spouse

If you are a sole proprietorship (not a Single Member LLC) there are two options you have in hiring your spouse. 

First, if one spouse controls the business, the second spouse is considered an employee and subject to Social Security and Medicare taxes, income tax, and FICA withholding. If you don’t have one, you’ll want to get Federal Employer Identification Number (EIN) which is your identification for having an employee. Most employers pay a federal and state unemployment tax as a part of the Federal Unemployment Tax Act (FUTA). Under certain criteria, you don’t' have to make Federal Unemployment Tax Act (FUTA) payments, which could save you around $420 a year. However, while FUTA payments are optional, your spouse gets Social Security credits and the option to have shared benefits, like a company retirement plan.  

Second, if both spouses have shared control and operation of the business and services, then a partnership exists. The IRS allows a special kind of partnership with spouses called a qualified joint venture. Note that common law marriage does not qualify. A qualified joint venture is not treated as a partnership for tax purposes, so you can still file the same Schedule C as if you are a sole proprietor if you: 

• Are a married couple filing jointly are the only members of the partnership,
• Both materially participate in the business,
• Both co-own the business and elect not to be treated as a partnership 

"Material participation" means the level of involvement or activity that an individual has in a business. The IRS has specific criteria to evaluate one’s material participation, including consistent time and activity and use of specialized skills. If spouses have a qualified joint venture with a sole proprietorship, they will each report their share of net earnings from the business on their individual tax returns using Schedule C (Form 1040). Both people will pay self-employment taxes on their share of the earnings. 

If your company is: 

• An LLC of any kind, even a single-member LLC (or what people sometimes call a sole proprietorship LLC);
• A partnership that includes someone other than your spouse; or
• An S or C corporation 

then you need to hire your spouse as an employee. Again, you will need an EIN and, in this case, you will need to pay all the appropriate taxes, as with any employee. Your spouse will get Social Security credits and any benefits your company offers. 

With an LLC or any other corporation, the spouse can be a co-owner in one of two ways. First, they can be a partner, member, or shareholder like anyone else you might partner with in a business. For example, you and your spouse could both be members of an S corporation or in a formal business partnership. Second, in community property states (which are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) your spouse is a shared owner through marriage. However, if they get a salary or receive profits, you'll need to make sure they're an employee or a formal member of the business. In other words, your spouse is a co-owner who can receive part of the assets if the company closes or if you pass away, but they aren’t treated as an owner or employee otherwise. 

Keep in mind that no matter how you employ a spouse, they should be treated like any other employee. For example, if you pay an assistant $14 an hour and you hire your spouse as another assistant, they can’t get paid $25 an hour - it has to be at the same or a similar level. You should also have your spouse to fill out any forms you require of other employees. 

If your spouse is a business partner of any kind, whether it's as a qualified business partnership or they're a shareholder of an S corporation, for example, you should have an agreement in place, just like you would with any other partner. Typically, an agreement would include: 

• Name of the business and its purpose
• Each spouse's capital contributions and percentage of ownership
• How profits and losses will be divided
• Decision-making and management responsibilities
• Roles and authority of each spouse
• Meeting procedures and voting rights
• Process for withdrawing from the partnership or dissolving it
• Dispute resolution methods
• Confidentiality clause to protect the business's confidential information
• Termination events, such as bankruptcy or death 

This might seem “a bit much,” but having an agreement can prevent problems that may arise as you share the business or at least provide rules for resolving them. 

Disclaimer 

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.