Married and in Business? Understand the Tax Implications
If you and your spouse jointly run a profitable unincorporated small business, you may face complex tax challenges that could increase your liability and compliance burden.
Partnership Classification: What It Means
By default, the IRS treats a jointly operated unincorporated business as a partnership, requiring:
- Filing Form 1065 annually
- Issuing Schedules K-1 to each spouse
- Tracking income, deductions, and credits separately
This setup can lead to additional paperwork and tax complexity.
Self-Employment Tax: A Hidden Cost
Self-employment (SE) tax covers Social Security and Medicare contributions. For 2025:
- 12.4% Social Security tax applies to the first $176,100 of net SE income
- 2.9% Medicare tax applies to all SE income
- An additional 0.9% Medicare tax kicks in if joint SE income exceeds $250,000
If both spouses earn $150,000 each from the business, the SE tax totals $45,900 — on top of regular income tax.
3 Tax-Saving Strategies for Spouse-Run Businesses
1. Use IRS Revenue Procedure 2002-69 in Community Property States
If you live in a community property state, you can treat the business as a sole proprietorship operated by one spouse. This allows:
- All SE income to be taxed under one Schedule SE
- Avoiding double Social Security tax exposure
2. Convert to an S Corporation
Outside community property states, consider forming an S corporation:
- Pay modest salaries to each spouse (subject to FICA tax)
- Distribute remaining profits as FICA-free dividends
- Reduce overall SE tax liability
Note: S corps require additional compliance, including payroll and corporate filings.
3. Hire Your Spouse as an Employee
Disband the partnership and:
- Treat one spouse as the sole proprietor
- Hire the other spouse as an employee with a modest salary
- File only one Schedule SE
This approach limits SE tax exposure and may allow for employee benefits like retirement contributions.
Final Thoughts
Running a business with your spouse can be rewarding — but also tax-intensive. Whether you’re in a community property state or not, there are legal ways to reduce your tax burden and simplify compliance.
Need Help Navigating Spousal Business Taxation?
As a CPA, CFF, and CGMA, I can help you evaluate the best structure for your business and implement strategies that minimize tax liability. Let’s talk about how to optimize your setup.