Can a Spouse Work for an LLC for No Pay?

By Jeff Franco J.D./M.A./M.B.A.

Married couples don’t usually separate their finances, and for all practical purposes, it doesn’t matter if only one spouse holds a membership interest in an LLC while the other provides services to the business for no pay. This is especially true if you file joint tax returns, as your income tax bill will be much the same as it would be had you split the income with your spouse. Social Security tax savings may be realized, however, by having one spouse work for the LLC without pay.

Married couples don’t usually separate their finances, and for all practical purposes, it doesn’t matter if only one spouse holds a membership interest in an LLC while the other provides services to the business for no pay. This is especially true if you file joint tax returns, as your income tax bill will be much the same as it would be had you split the income with your spouse. Social Security tax savings may be realized, however, by having one spouse work for the LLC without pay.

Spouse As Single Member

If you operate your business as a single-member LLC, the Internal Revenue Service will tax your business income as if you were a sole proprietor. Sole proprietors report net profit from an LLC on a Schedule C attachment filed with their personal tax returns. When filing a joint return, the net profit is combined with all other income that you and your spouse earn, and income tax is calculated on the total. Since your spouse would report any wages earned as an LLC employee on your joint Form 1040 anyway, the end result is approximately same. The only difference is how you categorize the income.

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Joint Return Illustration

To understand how this works, suppose your LLC earns a net profit of $200,000. Assuming that this is the only source of earnings for you and your spouse, the total income reported on your joint return will be $200,000, which is reported on the “Business Income” line of your Form 1040. Now suppose you pay your spouse a $20,000 salary. Since reasonable salaries are deductible to your business, it brings your net profit down to $180,000. However, despite reducing the amount reported on the “Business Income” line of your return, your spouse needs to report $20,000 of wages. Therefore, the total income remains at $200,000.

Self-Employment Tax Advantage

As a couple, you can save money on the Social Security portion of your self-employment tax by not paying the non-member spouse for her services as an employee or independent contractor. As the LLC member, you must pay self-employment taxes on your net profit – but employees and independent contractors pay these taxes on their earnings, too. Since there's a maximum amount of income (per spouse) that is subject to the Social Security tax, the spouse who works for free will not be subject to the tax at all.

Social Security Tax Example

When you file your joint return and report $200,000 of net profit on Schedule C, you’ll need to prepare a Schedule SE and calculate your self-employment tax. Although the rates and income limitations may change each year, assume the maximum income subject to Social Security tax is $110,100 and the rate is 12.4 percent. This means that the Social Security tax bill for the member-spouse is $13,652. Now if the non-member spouse takes a salary of $20,000, Social Security taxes must be paid on this amount. Notice, however, that the member-spouse’s Social Security tax bill remains unchanged despite a $20,000 reduction in net profit because of the salary deduction. As the non-member spouse’s employer, you can deduct the portion of these taxes that you have to pay, but at the end of the day, there’s still a significant increase in the net amount of Social Security tax paid by the couple.

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Why Is a Sole Proprietor Not Entitled to a Tax Deduction for Salary Payments to Himself?

References

Related articles

Net Operating Loss for a Sole Proprietorship

It isn’t uncommon for sole proprietors to report losses in some years, which are the result of incurring business expenses that exceed total revenue. You may be able to use these losses to offset some of the other income reported on your tax return. However, if after combining your sole proprietorship losses with your other income the result is still a loss, you may have a net operating loss, or NOL, that you can deduct from the taxable income you report in different tax years.

Are Members of an LLC Subject to Self Employment Tax?

The Internal Revenue Service requires all taxpayers to contribute to the Social Security and Medicare system through employment taxes. Employed taxpayers have these amounts deducted from paychecks. Members of an LLC who do not have employment taxes paid on their behalf are responsible for remitting self-employment tax payments to the IRS.

How to File Taxes for an LLC Company

How you file taxes for an LLC depends on how the business is treated by the IRS. A single-member LLC is treated as a sole proprietorship, and an LLC with more than one member is treated as a partnership by default, but either type of entity can elect to be taxed as a corporation and, if it qualifies, further choose be taxed as an S Corp.

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