Husband & Wife Working Together: Incorporate or Not?

Dear June,

I am a freelance designer. My husband works for an advertising company. Once in a while he helps me out with my work. My friend's accountant told her that I'd save a lot of money if I incorporated. Should I incorporate and put my husband on my payroll? I'm confused because I don't really know how a corporation works.

Thanks.
Janice from Ohio


Hello Janice,

Do not incorporate unless your personal tax pro analyzes your unique situation and gives you specific, understandable reasons why it would be better for you.

Here's a snapshot of how a corporation may handle income:
In a corporation, the tax benefit of retained earnings -- that's corporate profit that is not distributed but kept in the corp for future business spending -- comes into play only when you make a lot more money than you need to live on. By doing this, you leave some of the earnings of the corp in the corp and do not have them available for living expenses.

In your corporation you would earn money as a designer. These would be your wages. Your husband would earn wages. The corporation would have a profit on which the corporation -- that's you -- would pay tax. The corporation profit -- in the form of dividends is distributed to you.

On yours and your husband's tax return you include your wages, his wages and the dividends. You pay tax on that income. Note that on the dividends, the corp -- you -- have already paid tax once. Now you will pay tax on those same dividends again.

You must pay whatever fees your state requires for setting up a corp. You must pay an accountant to help set up a corp and every year to prepare a corporate return for the feds and also for the state. There are various required papers, such as corporate minutes, that you'll need to keep.

All this is a hassle and expensive and so you don't want to do it unless you must.


When you have a sole proprietorship and you hire your spouse as your employee this is what happens or may happen:
-- Your wages to him simply move the income from one part of the return to another. No tax change. -- If he must accompany you on a business trip, his expenses are business deductions. Not so if he were not an employee.
-- You may provide him with a health plan that covers his family [that includes you]. All family medical expenses then become deduction against your business income.
-- You may give your spousal employee dental coverage, life insurance, disability coverage, a pension -- all are deductions against your business income.

And, if he works out really well, you may give him a raise.

Keep in mind: A sole proprietorship may be an LLC. Read about it here Sole Proprietor as an LLC

Best,
June

Multi-faceted Sole Proprietorship

Dear June,

Thanks for the great site! I am a teacher/tutor/editor/writer.

This year, I have taught part-time at a university and worked as a temp. I want to set up a tutoring business. I was advised that I could cluster all my writing-tutoring-etc. earnings together by starting a "sole proprietorship" in my own name. 1. Is this true? 2. If so, wouldn't it be better to register it officially? (one of your pages starts by saying you needn't, and then goes on to say there are many situations where you do).

I like the "one name" idea so I could put the income streams together, though I prefer a trade name for privacy reasons.

However, given my situation, what would you suggest is the best way to go forward.

Thanks for your help!
Anna from California


Hello Anna,

Glad you like my site. Thanks for letting me know.

Yes, all elements of your business are related and so you may be one sole proprietorship. [Of course, this does not include any income as an employee.]

I don't know what you mean "register officially." Other legal matters you must take care of depend on on local law and state sales tax. However, those requirements have no bearing on your being a sole proprietorship.

A trade name -- DBA, doing Business As -- does not mean that you cannot be a sole proprietorship. See the "business name" category on the left.

All indications are that sole proprietorship is all you need. If you haven't already, be sure to read , I am a Business on my website.