When you run your own business, staying on top of your taxes and out of trouble with the IRS is likely one of your chief concerns. Your company’s tax obligation will typically depend on the complexity of your business model. This is why so many entrepreneurs in your position choose to structure their companies as sole proprietorships. Such businesses are the easiest to manage and usually require the least hassle during tax season. However, even sole proprietorships offer their own unique set of struggles. While it may not seem like it, the greatest struggle that many sole proprietorship owners encounter is not violating the cardinal rule of such companies: maintaining management under one person. That essentially is the only demand the IRS requires when you designate your business as such. Maintaining the appearance that you are the only one in charge of your company may seem simple enough, yet things can get complicated if you choose to bring your spouse on board.
Why Worry About Bringing Your Spouse on Board?
It may seem like a no-brainer to involve your spouse in the running of a company. The amount of time that the two of you spend together allows you the added benefit of being on the clock while not on the clock. Important business matters can be discussed at the dinner table, and the next day’s plans and assignments can be handed out before bed, allowing you to fully optimize your time for other tasks during standard operating hours. It’s in determining the role that your spouse will play in your company, however, where you can easily go wrong the eyes of your not-so-friendly state and/or federal tax collector. The solution most sole proprietorship owners in your position resort to when involving their spouses with their work is to designate them as volunteers. The method of thinking behind this decision is that as long as he or she is not collecting a salary, then your spouse presents no trouble to your business tax considerations. Yet the IRS will look at more than your spouse’s actual designation within your company when considering whether his or her involvement may be in violation of sole proprietorship standards. It will examine the actual details regarding his or her work, and if he or she is engaged in any of the following activities:
•Advertising your business
•Signing business-critical documents
•Serving as the single point-of-contact for clientsIn each of these instances, an argument may be made that he or she is being identified as the business owner in the eyes of the general public. If so, then an equally-compelling case may exist as to whether or not your business is perceived as a sole proprietorship. If so, then you could end up facing both local and federal back tax payments and penalties. The solution to avoiding this may be to list your spouse as an independent contractor and compensate him or her. However, this too presents a potential challenge in that you then place the responsibility of paying self-employment tax on him or her as well.
Looking Past Your Tax Concerns
Even though the tax implications of involving your spouse in your business may concern you, there are others that should weight equally as heavy on your mind. Foremost among them may be the potential for marital strife that could arise by stressing the potential tax liability that your spouse could be to your business. Doing so automatically limits the amount of input he or she is able to give, which could create the perception that his or her contribution is not valued. If such a scenario worries you more than any tax consequences, you may want to consider avoiding them altogether and instead opting for a general partnership. Owning and operating a sole proprietorship may just be the best way for you to do business. Yet at the same time, it’s important that you remember to always keep all aspects of the management of the company under your control, even if you choose to involve your spouse in the running of your business. If you’re concerned about dealing with the challenges that doing so will present, it may be best to consider forming your business under a different structure.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.