SE Tax issues of adding spouse to LLC?

Question

What are the SE Tax implications of adding my spouse to my LLC?  Here's my scenario: Right now, all of our income comes from my employment salary, and from investments (rental income from RE and Stocks).  My income is high enough that all of my SE taxes are paid from it for the year.  My wife currently pays no SE taxes, as she is not employed and has no personal income, i.e., we are a single-income family.  We file a joint return.  Our RE rental income (and other side ventures) are managed in an LLC, which has been only me (no employees).  If my wife starts to work with me in the LLC, is there a preferred setup that would lessen the tax implications of her having to pay SE tax?  Should we make her a Member?  An employee?  None of the above?  Does it even matter?  Bottom line, I don't want to incur a bunch of additional SE taxes on our joint return simply because my wife started working in our own LLC...   Thanks.

Steve Vaughan · Answer

@Chris Coleman, yes as a multi-member LLC I file a form 1065 and with it the 8825 (Sch E equivalent) and respective k-1s.  It's not too bad, though without being large enough to have to do schedule L & M. I wouldn't want to do those on me own!

Chris Coleman · Answer

@Steve Vaughan, thanks.  So for tax filing purposes, does having your wife as a Member make your LLC a Partnership and thus requiring its own annual return (Form 1065), or is it still just a pass through (Schedules C and E) on your Joint return?

Steve Vaughan · Answer

My spouse is a passive investor in my LLC, as are my children.  Sometimes they help clean or paint a unit unpaid.  No SE taxes for passive members as far as I know!

Chris Coleman · Answer

@Cameron Skinner and @Stephen Chittenden, thanks much!

Stephen Chittenden · Answer

Chris,

You should consult an individual tax advisor (and I am not providing any advice here, just providing general information that may or may not apply to your situation), but in most cases if she were a member she would have self-employment income from any active income derived from the business.  (Passive income (rental income) is not generally subject to SE tax (SECA tax) even if earned through an LLC.)  If you make her an employee, you will have to withhold the employee share of FICA taxes, pay the employer share of FICA taxes, pay SUTA tax (maybe), pay FUTA tax (maybe), and withhold Federal Income Taxes on her pay.

Mike

SE Tax issues of adding spouse to LLC?

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