NFIB:
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.
Jan Zobel EA on February 4th, 2005 at 7:54 pm
Just want to add to Dane’s comments –
Employing your spouse in your business can be a major tax savings move. By “employ”, I mean taxes are withheld, w-2s are filed, etc. There are a number of benefits that employers can offer their employees, even if the spouse is the only employee. These include health insurance coverage, medical reimbursement plans, dependent care programs, etc. An example: Mary employs her husband John to work in her business. She buys a health insurance policy to cover all her employees and their families. John is the only employee so he gets full health insurance coverage for himself and his family, including Mary. Mary gets to write the whole thing off as a business expense.
Definitely worth considering.
Jan Zobel, EA
author, Minding Her Own Business: the Self-Employed Woman’s Guide to
Taxes and Recordkeeping http://www.janztax.com/book_flyer/book_flyer.htm
teacher, tax seminars for self-employed people http://www.janztax.com/Seminars/tax_seminars.htm