Important Facts to Consider When Running a Business With Your Spouse
By Vicki Gerson (02/ 01/ 2005)
Article from the National Federation of Independent Business.
Many people thinking of buying a business anticipate that their spouse will be involved in it. However, before you open your doors, it is important to think about how much – and what kind of help – your spouse will give you.
It is also important to define your spouse’s role so the Internal Revenue Service will not misinterpret the kind of help your spouse is providing. The spouse who works a set number of hours a week, participates in important decisions and gets paid may be looked at one of three ways to the IRS. The IRS may consider the spouse a business owner, an employee or an independent contractor.
If your spouse considers herself or himself an owner, then it’s important to structure your business as a partnership, LLC or corporation. If you don’t take one of these three routes, then you must treat your spouse as an employee or independent contractor.
For those business owners who have a spouse who only helps out occasionally without pay, you may have a business that is a sole proprietorship as your business structure. As long as you never pay your spouse at all, the IRS will usually accept this situation. Because tax laws change yearly, check with your accountant before taking any action on establishing a business structure.
There are numerous advantages to keeping your business as a sole proprietorship because it can benefit you financially. As a business owner, you have free labor. Whatever task your spouse performs doesn’t cost you a cent. More importantly, you don’t have to pay payroll taxes on your spouse. Owning and operating a business means detailed record-keeping; however, because you are not paying your spouse, you don’t need to keep records as to what hours or when he or she is working. By not declaring your spouse an independent contractor, he or she doesn’t have to pay self-employment taxes. When your spouse isn’t a part owner of your business, you don’t need to file a partnership tax return.
There is a downside to this type of business structure that you should keep in mind. By law, your spouse won’t be a legal owner of the business; however, marital property laws (check with your state) may give the spouse a part of the business anyway.
Before you make a final decision on which type of business structure to establish, make sure you have thought the situation through. How do you really see your spouse’s role in this business? It may be tempting to say you’re a sole proprietor, but consider the help you really need. If your spouse will provide many hours of help per week, and you depend upon that help, then a sole proprietorship might not be the right choice for you.
Also consider that if your spouse is really working at the business and trying to sneak by as a volunteer, the IRS may discover this during a routine audit. For example, during the audit, the IRS agent may see that your spouse signs checks and delivery receipts. The IRS may also question your sole proprietorship if it sees that you’ve gone on extensive buying trips and taking travel deductions while your spouse is conducting sales at the business.
If the IRS agent decides your business isn’t really a sole proprietorship, it can force your spouse to pay self-employment taxes. Also in this case, there may be penalties.
Unfortunately, now that you have the IRS’s attention, you are likely to be audited more frequently. That is not good for you because it can cost you time (extra careful record-keeping) and money (involving your accountant) for any future audits.