Can I File Taxes as Sole Proprietor and Jointly With My Wife?

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

Married couples who file their taxes jointly usually save more in tax than filing separate returns, because of the favorable tax brackets. You can still take advantage of this tax benefit even if you earn income as the sole proprietor of a business. Being a sole proprietor means that you didn't create a separate legal entity for the business. As a result, everything you earn is reported on your personal tax return, no distinction exists between your business and personal assets and you're personally liable for all business debts.

Schedule C Reporting

Reporting your sole proprietor income on a Schedule C is always required, even if filing jointly with your spouse. The IRS only taxes you on the net profit you earn, which is essentially all business revenue, minus any deductible business expenses. The Schedule C form is used to calculate this net profit, separate from any income your wife earns, as well as your other sources of taxable earnings.

Joint Return Implications

When preparing a joint return, it’s important that each Schedule C identifies which spouse is the sole proprietor. In fact, the first line of the Schedule C form asks for the name and Social Security number of the sole proprietor, so make sure that you insert only your name and SSN. Once you compute your net profit, you transfer the amount to the “business income or (loss)” line of your joint 1040. Despite the Schedule C reporting of your sole proprietor earnings, it’s ultimately added to all other income that you and your spouse earn to arrive at your taxable income number. And depending on how much other income you report, including the net profit on the joint return may be enough to push some of your income into a higher tax bracket.

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Self-Employment Taxes

Sole proprietors also need to consider the self-employment tax liabilities that accrue on the net profit reported on Schedule C. If your net profit is $400 or more, you’ll need to prepare a Schedule SE to calculate your self-employment tax bill. These taxes are in addition to the income tax and fund in the Social Security and Medicare programs. Moreover, married couples are liable separately for these taxes, so if your spouse is employed and pays Social Security and Medicare taxes through employer withholding, it has no impact on your own self-employment tax liability. Luckily, sole proprietors are able to deduct approximately one-half of their self-employment tax bills on their joint returns.

Calculating Joint Tax

The last step in completing a joint return is calculating the amount of tax that you and your spouse owe on your joint income. Whether you calculate your tax by hand, hire an accountant or use online tax preparation software, the underlying calculation is the same. Each tax bracket that joint filers use includes a wider range of taxable income than other filing statuses. This is beneficial because a greater percentage of your income is taxed at lower rates. So even though including your sole proprietor income with your spouse’s earnings may subject your joint income to higher tax brackets, it usually saves you more money than filing separate returns.

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References

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