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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7461
Experience:  15years with H & R Block. Divisional leader, Instructor
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Community property state, Filed schedule c in past for LLC,

Resolved Question:

Community property state, Filed schedule c in past for LLC, should we add wife to LLC, or pay her a salary since she takes on huge role as administrator several days a week. (The LLC was formed while parties were together, but right before marriage. So separate, - would be arguably community in divorce proceedings, so whether she is added or not is not relevant to that respect - but merely for tax purposes which would be our better choice.) Also we would like to make my income as low as possible for child support reasons, considering she is in fact the one doing much of the work, but the business is showing as my income - she also has another job)
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
To add her on the LLC would mean partnership. If you elect not to be a partnership then as spouses you could be joint venture (but this would still carry over to self employment).
If you hire her as an employee, the business would be allowed to deduct the taxes paid and the wages.

Robin D. :

The business would have the expenses for the employee if you take that route.

Robin D. :

It will help me to continue with our "Chat" if you can type a response.

Robin D. :

Your options are limited as to what you legally can do because you are already registered as an LLC.

Robin D. :

You can cannot claim Joint Venture (where you each would be using the Schedule C) because only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election.

Robin D. :

If you add her then you are partnership (all income of the partnership flows to you in your percentage of ownership). If you hire her then you would be allowed to use the wages and the tax paid by the LLC as an expense. the remaining income that flowed to you would be the taxable and that would be lower.

Customer:

So if we added her we would each have a schedule C with 50/50 - My income would be 50%

Customer:

If I hired her as employee then she would get the wages, and all remaining at the end of the year would be my income?

Robin D. :

Normally yes, but as this is an LLC you would have to change to partnership and then you would not file as Schedule C sole proprietors.

Robin D. :

If this was not an LLC then you would be allowed to just split the business with yoru spouse as a Joint Venture.

Customer:

In a community property state I can still file a schedule c is what I read

Robin D. :

There are special rules for com prop states. Rev. Proc. 2002-69, 2002-2 C.B. 831

Robin D. :

One sec and I will get that

Robin D. :

If this business was owned by you prior to the union and is not under the community property rules of your state then you would not use the Schedule C.
I will need to look at Washington specific

Customer:

But if I add her to it, and she runs it with me - it becomes community property

Robin D. :

Yes, Washington allows for following Rev. Proc. 2002-69, 2002-2 C.B. 831. So you would still be allowed to each use a Schedule C and claim 50% (if that is the agreement).

Robin D. :

This procedure was really intended to ensure that both spouses were allowed credit for SS as each now will show their own self employment

Customer:

So are there tax benefits to adding her in this way, rather than as an employee?

Robin D. :

As to whether this will then assist you in Child Support , that woudl need to be looked at by Family Law attorney.

Robin D. :

The taxes paid by each of you for your self employment will be deducted but not from the SE income itself (like wages would be). You will each get to claim the half on your 1040 though.

Robin D. :

The expenses will be split unless either of you pays something specific of course.

Robin D. :

If the IRS should contact in the first year you do this, you should contact the toll-free number that is shown on the notice and advise the telephone assistor that you reported the income on your jointly-filed individual income tax return as a qualified joint venture. Or you could write to the address shown on the notice and provide the same information.

Customer:

Ok Thanks - I think I will try and find someone to discuss this with further as you have given me the basics which I already knew as I explained to you - I have heard there are many benefits to having your spouse involved in the business such as insurance, deductions, education, retirement, etc -- This may to complex of a discussion for this forum and the community property laws do not seem to be a topic you are super familiar with. Thank you though

Robin D. :

As she has another job, insurance may not be an option for her to deduct. Retirement yes, but again as she is employed already she may be limited if retirement is an option.

Robin D. :

You are correct about the complexity.

Robin D. :

We are generally supposed to stay within a general area of advise

Customer:

Thank you!

Robin D. :

That is because there are too many variables that can be missed or omitted.

Robin D. :

You are welcome

Robin D. :

I want you to have a great experience in using Just Answer

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7461
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 7 other Tax Specialists are ready to help you

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