Sole Prop For Married Couple Or pay spouse as contractor?

1 Reply

Hello, 

I really really REALLY want to operate as sole prop. I live in Ca with high LLC fees Id like to avoid. I've run other sole prop businesses and I am very familiar with the paperwork required so I feel comfortable with that to start.

However I am newly married and I was revisiting the tax laws for sole prop run by married couples. I am in a community property state if that matters.  My husband currently is a stay at home dad, he does no work outside the home and has no income at this time. However  he is a key player on our team. He's the  handyman and carpenter, as well the good cop  ;) 

So from what I was looking at on the IRS site if we own the sole prop as a married couple we have to file two Schedule C and both pay the self employment tax?   This seems expensive. If Im going to pay that much, I might as well pony up $800 to the  FTB for year for an S-Corp.   I do like the idea of making my parents shareholders in my company if I can. I won't have them as partners! And for 800 bucks a year I'd rather go corp, as in Ca a RE broker can only be an S corp And that is the path I am on at the moment.

Or my alternative is to run sole prop and either hire my husband as an employee or contractor. I also like that idea, because I can open up a 401k for him. However this causes payroll taxes and more paperwork.   I can do payroll paperwork but I know I hate it. 

I am trying to figure out the cheapest way to do this to start.  I am worried that if I try to run sole prop, dont include him in the biz  the IRS is gonna nail me because he has no job besides stay at home dad.   He won't be working nearly as much as me, maybe a 75/25 split.   

Do most couples in a JV open an LLC?

There is essentially no difference in the two plans you laid out.

Plan A:  Each of you files two Schedule Cs for half of everything 

or

Plan B: One of you claims all of the income and expenses and then "hires" the other as a subcontractor.  While the first spouse receives the deduction, the second spouse then claims that income on -  Schedule C - and pays self employment tax.

It's the exact same result, but you've at least transferred some Social Security/Medicare over to the second spouse for retirement purposes down the road, so that's good.

If you're looking to figure this out for being a landlord, then you just put everything on one Schedule E for property you own jointly.  There's no self employment tax involved, so no worries about getting income in both names.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.