Husband-Wife Business: No cheating!

I have been sent many questions about husband and wife working together in a business. A good place to start for info on such joint ventures is my post The Many Advantages of Hiring Your Spouse then follow up with the posts in the category husband-wife business .

Below are some recent questions on the subject.

Dan, from Colorado, has paid the maximum social security limit through his salaried position. Dan’s wife has a home-based business that nets about $50,000 per year. Dan’s CPA , who reminds me of Sammy Segar, the clueless accountant in my book, Self-employed Tax Solutions , has suggested that Dan and his wife file a joint Schedule C: Profit and Loss from Business. This way they could split the profit 50/50.

As you know, you must pay self-employed (SE) tax on your profit. For Dan’s wife that would be about $7,500 [15% of $50,000]. If half that income were Dan’s and had he already met the SE tax maximum that would save them about $3,700. Good idea were it legit.

Dan said: “In the evenings and weekends I work with her on her business.” That doesn’t sound like 50% of the work to me. Maybe 5%. I think the beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.

Sammy Segar came up with another idea for Dan. And I must tell you that this is another one of those let’s-not-treat-indies-like-real-business-people approaches that really make my indie blood boil. Dan reports: “Another comment he made is we might want to go the partnership route and file a partnership return for the business ... he mentioned this because of some statistic he read that says the IRS is greatly increasing their audits of returns filed with a schedule C, something like 1 in 7 are now getting audited.”

OK, let’s see, Sammy is telling Dan to lie about how much work he puts into his wife’s business and put that lie in writing into an expensive partnership return that will benefit the CPA’s bank account and give no honest tax advantage to Dan and his wife.

And a 1 in 7 audit rate! Oh, come on. And even if it were correct, which it is not, honest-to-goodness indies should never fear an audit.

By the way, Dan purchased my book, hoping that the pros and cons of a husband-wife business would be covered. Sorry to say, that topic is not addressed in the basics of Self-employed Tax Solutions. Maybe in the next book!



Mary, a personal trainer / Pilates instructor from San Rafael, CA, has been self-employed since October 2007. In June 2008, her husband reactivated his contractor's license for drywall construction.

Here is Mary’s question as sent to me:

“We are now both self-employed, operating our businesses from our home. We both have a designated room/office for our businesses. I was told that it is ‘better’ from a tax standpoint for one of us to be an employee and one to be self- employed."

Mary then asked something about Social Security tax that I don't quite understand and she also asks if there are any "other other advantages/disadvantages” to the husband-wife business.

Apparently it's not just indies who are confused about SE tax. Sammy Segar, CPA has it all messed up too. SE tax is a combo of Social Security and Medicare tax. In 2008 you pay Social Security tax on income up to $102,000. There is no limit on Medicare tax. You pay Medicare tax on whatever earned income you make.

If you have a job that pays $102,000 you will have met your Social Security tax maximum. If you then make another $100,000 as an indie you are not required to pay any Social Security tax on that income. You will still pay Medicare tax.

So in a husband-wife business SE tax is saved only if the employee-spouse has earned enough income elsewhere to reach the maximum Social Security limit (as in Dan’s situation above). To form a husband-wife business to avoid paying Social Security tax is a fraudulent practice.

I am legitimately creative but I have a hard time figuring out how to make one business of a drywall contractor and a Pilates instructor -- if indeed that’s what Mary is asking.

I didn't print Mary's entire question because it was unclear, which brings me to something I have stressed in all my writing and speaking: Think before you ask – whether speaking or in writing. Make your question as clear as possible. If you don’t, you will not get a clear answer.

-- June