Single Member LLC with joint tax return

[Mo__]

In a single member llc in CA filing a joint return with the wife, and wife is helping out with the business without pay.

- How should this be filed?

- Is it ok to file as one schedule C as tax implication doesn't change? 

- If there are corrections required for prior years can they be made, if so how?

- Is there anything specific that need to be done to show it is a single member with husband and wife?

[Carl]

A SCH C is used to report the  business income/expenses of a single owner business. Period. Doesn't matter that it's part of a joint return. But only one of the joint tax filers can be the owner of the business. There's also nothing wrong with one joint filer being the owner, and the other joint filer being an employee of that business whose pay is reported to them by the business on a W-2. (Helps increase the amount the W-2 employee spouse can make to a retirement account.)

[Mo__]

Since me and my wife are only one contributing to the business I was avoiding the trouble of creating W2s etc. Online people seem to suggest that it's ok to have a single member LLC but treat it as husband and wife LLC in a community property state. Hence all of my questions in my first post.

[Carl]

Being in a community property state, the correct way to do it, is to split the business income/expenses right down the middle for each of you. Then report that business income/expense on a separate SCH C for each of you, as a part of the joint 1040 return.
With only one of you as the "official" owner from the federal perspective, the business EIN is assigned to the SSN of that one owner. Therefore the owner of the business will use the registered EIN on their SCH C, and the spouse will use their SSN on their SCH C. That will keep things separate, correct, and in perspective so that each of your social security accounts is property allocated their portion of the SE tax.

[Mo__]

Currently we use only one schedule c to report everything. Do we need to correct that approach and amend the return? Is that wrong to just file one schedule c?

[Carl]

If only one of you actually owns the business, you're fine. It still doesn't change things for you in a community property state. The thing is, the SE tax is only applied to that owner's Medicare and Social Security account. I'm self employed too, and only I own the business and only file one SCH C. My wife is employed as a W-2 employee (not by be) so her SS and Medicare contributions are based on her earnings.

[Mo__]

In my case what I am confused about is that my wife helps in the business and a small portion of total earnings and didn't make sense to add the w2 overhead, so what I am not clear is if I am ok filing just one schedule C for both of our work or do I know need to amend my return and file 2 schedule C. I just want to make sure that I am doing things the right way. What are the implications of filing just one schedule C

[Carl]

You can't file one SCH E for more than one person. Period. There can only be one owner of a single member LLC. There are no exceptions. That's why it's called a *single* member LLC. So your wife helps. Big deal. I'm self-employed with a single member LLC and my wife helps sometimes too. So what? I guess I'm not understanding what is so confusing to you about this.
" my wife helps in the business and a small portion of total earnings "
What about small portion of total earnings? Either she is a paid W-2 employee of your single member LLC, or she is not. It sounds to me like you're making mountains out of nothing. There's not even a mole hill here. Or has there been a falling out and she's threating to sue you for back wages? If so, it's a waste of time if you live in a community property state. Upon divorce, she get's half the business earnings just because she was married to you. Doesn't matter if she worked for you or not. Doesn't matter if you paid her to work for you or not either.  
"didn't make sense to add the w2 overhead"
If in my business my wife regularly participated in my single member LLC, it would not make sense to *not* hire her as a W-2 employee. Her wages can be used to figure her retirement contribution to her 401(k) I would establish for her, and her wages as well as the employer side (that's me) of any contributions to her retirement account would be a tax deduction for my business. That would reduce the self-employment tax on my business income quite a bit.

[Mo__]

Sorry for the confusion, my question really is that do I need to let IRS know that we are operating as married single member LLC as some of the income is being brought by my wife. I guess how do we show the current state of affairs. Or what I am doing currently is ok where everything is just shown on 1 schedule C with joint return. And thanks for the explanation for W2 related question.

[Carl]

"my question really is that do I need to let IRS know that we are operating as married single member LLC"

No. There is no such thing as a "married single member LLC". The IRS doesn't care who brings in the income.  The IRS does not care if the single owner is married, single, divorced, or even dead. (Literally! no joke either!). The IRS only cares that the single owner of the business pay their taxes on that income. The way you word the question seems to indicate to me that you don't "quite" understand the concept of "single member LLC". You see, "WE" can't own a single member LLC. There is no WE in single member. There is only "I" own a single member LLC, or "you" own a single member LLC.  No more than one person flat out no way, no how, under any circumstances, can own a single member LLC.

[Mo__]

I think I got confused in this article when it says LLC owned by married couple and later it talks about Single member LLC. <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2133106-how-should-a-husband-wife-llc-file">https://ttlc.intuit.co...>

[Carl]

That makes sense, as I can see how that can be confusing if one doesn't read it carefully and literally (with "literally" being the key word there). Sometimes when people are reading the IRS pubs they tend to "read between the lines" information that just flat out is not there. So if you're not careful it's easy to get confused without even realizing just how confused you are. But here's some information from that pub that most likely does not apply to you.

If you registered your LLC with your state and named more than one officer, then you do not have a single member LLC. For example, if you registered your name as the MGR (Manager) and your wife as a managing officer (Be it CFO, CEO or whatever) then you do *NOT* have a single member LLC. You have a multi-member LLC. For that you file a completely separate IRS Form 1065 Partnership return. THen the partnership will issue each owner a K-1 which each owner will use when completing their personal tax return. Now in states that are not a community property state, even if the two owners are married to each other, they can't use SCH C at all and must file the separate 1065 partnerhip return. However, for those in a community property state the IRS does have an exception.
When you have two owners of a multi-member LLC *AND* those two owners are married to each other *AND* those two owners will file a joint tax return, then you can include a SCH C with your joint 1040 tax return for each owner. All business income/expenses would be split between the two owners 50/50 unless your Articles of Incorporation state otherwise. Then each owner will report their share of the business income/expenses on their own SCH C.

Now if your business has depreciable assets this can be more trouble than it's worth really. So if you're in a community property state and both of you are the registered owners of the business, you have the choice of splitting your business income/expenses between two SCH C's or filing a single 1065 partnership return. THen for the K-1's the partnership would issue to each of you, you'll each report your individual K-1's on your joint 1040 tax return.

Hopefully I've not added to the confusion. But like I always say..............
He who claims to understand the situation and all aspects of it, is obviously not paying attention. 🙂

[Mo__]

Thanks for detailed and clear explanation! I understand it now. Just last 2 questions 1) If my wife is listed as an Agent does it make a multi-member LLC? 2) If I add my wife as a member then is it effective only going forward or can it be made effective for previous year? Thanks again.