Tax Strategies for Spouse Owned Businesses
Posted by John Anderson on September 08, 2025
Owning a business with your spouse can be rewarding but it also comes with unique tax challenges. If your business is unincorporated and profitable, understanding these rules can save you time, stress, and money.
Why Spousal Businesses Face Special Tax Rules
When you and your spouse jointly operate an unincorporated business, the IRS generally treats it as a partnership for federal tax purposes.
- You must file Form 1065 (U.S. Return of Partnership Income) each year.
- Each spouse receives a Schedule K-1, reporting their share of income, deductions, and credits.
This extra paperwork is just the beginning. The real challenge often comes from self-employment taxes.
The Self-Employment Tax Hit
Self-employment tax covers Social Security and Medicare contributions for business owners. For 2025:
- 12.4% Social Security tax applies to the first $176,100 of net self-employment income.
- 2.9% Medicare tax applies to all SE income, increasing to 3.8% if your joint income exceeds $250,000.
If your business earns $300,000 and you split it 50/50, you’ll each pay self-employment tax on $150,000. That’s about $45,900 in self-employment taxes combined on top of regular income tax.
Three Ways to Reduce the Tax Burden
1. Elect Qualified Joint Venture Status (Community Property States)
If you live in a community property state, IRS rules (Rev. Proc. 2002-69) allow you to treat your business as a sole proprietorship for tax purposes. This can significantly cut your SE tax bill.
- All income is reported under one spouse.
- Only the first $176,100 is subject to the 12.4% Social Security tax.
2. Convert to an S-Corporation
Switching from a partnership to an S-Corporation can reduce self-employment taxes because:
- Only salaries paid to you and your spouse are subject to Social Security and Medicare taxes.
- Remaining profits can be distributed as FICA-tax-free dividends.
Keep in mind: S-Corps have additional compliance requirements, so weigh the pros and cons.
3. Hire Your Spouse as an Employee
Another option is to dissolve the partnership and operate as a sole proprietorship, then hire your spouse.
- You’ll pay FICA taxes on the spouse’s salary, but at a much lower amount than self-employment tax on half the business income.
- Bonus: You may be able to offer employee benefits like retirement contributions.
Bottom Line
Running a business with your spouse can lead to unexpected tax bills if you don’t plan ahead. The good news? With the right strategy, whether it’s electing joint venture status, forming an S-Corp, or restructuring your role you can minimize taxes and simplify compliance.
Contact us today to explore the smartest tax strategy for your family business.
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As a tax manager, John provides tax compliance and planning services to a variety of commercial businesses and individuals. His primary focus is servicing clients in the real estate industry, both commercial and residential.