You may have a joint venture with your wife with both - see more information here - http://www.irs.gov/businesses/small/article/0,,id=97732,00.html
A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists.
There is no limit on your earnings - but if your earning is above the limit - your SS benefits will be reduced by the SSA by deducting $1 from your benefit payments for every $2 you earn above the annual limit.
Let me know if you need any help in reporting your and your spouse's income.
To make sure I understand fully, please consider the following hypothetical scenario based on your explanation:
The wife is the sole owner of the LLC and hires the husband as an employee. He works the maximum number of hours each month that SS allows and does not earn income beyond the SS maximum (i.e., the point where benefit reduction kicks in), thus the husband continues to collect the full allowed SS benefit. At the end of the year the wife's LLC shows a $50,000 profit.
First of all, would SS find this arrangement acceptable, and secondly will the arrangement cause any special problems in filing taxes (e.g., change of status from a joint filing to separate filings)?
The scenario above is absolutely valid, however - there will be additional overhead for employment return filing and employment taxes.
If your wife is the sole owner of the LLC and controls the business - she may report all income - and there is no need to pay wages to you - tax wise - there will not be any difference - but much less paperwork and overhead.
As you are receiving SS benefits - there will be another issue - 85% of your SS benefits will be taxable if you file a joint tax return.
If you file as married filing separate - only 50% of your SS benefits will be taxable, but your wife's tax liability will be higher.
So - I suggest to try both ways before making finalize your tax return.
Let me know if you need any help.
Tax Preparer
Taxes, Immigration, Labor Relations