If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
2 Strategies To Ease The Burden
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.
1. Establish that you don’t have a spouse-owned partnership. While
the IRS creates the impression that involvement by both spouses in
an unincorporated business automatically creates a partnership for
federal tax purposes, in many cases, it will have a tough time
making the argument — especially when:
The spouses have no discernible partnership agreement, and
the business hasn’t been represented as a partnership to third
parties, such as banks and customers.
If you can establish that your business is a sole proprietorship (or a
single-member LLC treated as a sole proprietorship for tax
purposes), only the spouse who is considered the proprietor owes
SE tax. Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).
2. Establish that you don’t have a 50/50 spouse-owned partnership.
Even if you do have a spouse-owned partnership, it’s not a given
that it’s a 50/50 one. Your business might more properly be
characterized as owned, say, 80% by one spouse and 20% by the
other spouse, because one spouse does much more work than the
Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650). More-complicated strategies are also available. Contact me to learn more about how you can reduce your spouse-owned business’s SE taxes. © 2017