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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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If someone owns a business with their wife and splits the profits, but only one spouse is

Customer Question

If someone owns a business with their wife and splits the profits, but only one spouse is "active" making all the business decisions, and the other spouse, is inactive (passive) not making any of the business decisions, or management of the company and profits are split 50/50, will FICA, Medicare and other SE Taxes be paid only on the Active Spouse and the other would be exempt from FICA, etc.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
In this case - I suggest to have S-corporation as the business entity.That will allow to pass the business profit via K1 equally to each shareholder - who might be spouses in your situation - and that profit woudl not be subject to employment taxes.However - the spouse who actively participates in business operations will receive reasonable wages for his services - and wages - and only these wages will be subject to employment taxes.That structure will reflect your intention to save on employment taxes.
Customer: replied 1 year ago.
Does it have to be a Sub-Chapter S. The company was already formed as a LLC and filing as a Partnership (1065)? If an LLC, does this prohibit active (husband) and passive (wife) ownership where the wife does not provide any services, so no wages (or are wages required even when no services are being provides). Completely, passive -- no participation..
Expert:  Lev replied 1 year ago.
In case of the partnership - it would be considered active participation based on the participation of the spouse - and will be subject to self-employment taxes for each spouse.If you truly want to reduce employment tax obligations - in this case S-corporation election would be preferable.You may make such election for the same existed LLC.