Should my spouse become an employee for our business?

[2793933]

During the pandemic I started my own business, I set up an Llc and I am listed as the owner. I'm paying myself a salary which I share with my wife, we have a joint bank account, this is our main source of income. Recently my wife began helping with the business, she's involved in keeping financial records, answering phone calls and marketing, legally she does not own any part of the business. So my question is should I continue to pay myself the way I have been doing it since we share all of our money? should I make her and employee of the business? or should she become a 1099 employee?   

Thanks 

[Anonymous]

a single-member LLC unless electing taxation as a corporation is a disregarded entity.  Basically for tax purposes no different than a sole proprietorship.  a sole proprietor takes no salary. what they take out of the business in the way of profits is not salary. They are taxed on the net income of the business ignoring any payments to the sole proprietor for "compensation"

your options for your spouse - 1)pay her nothing

2) your wife can not be an independent contractor when working for you.  you can pay her a reasonable salary for the work she does. keep records in case the IRS ever makes an inquiry. if you do you'll have to file quarterly payroll tax returns and make payroll tax deposits.  most likely since she is an employee state law will require you to carry workmen's compensation insurance. if require and yo fail to do so states can impose hefty fines

3)   When a Spouse Regularly Takes Part in the Business

In some circumstances, it may be best to make the spouse a member of the LLC when any of the following occurs:

The spouse receives payment for their contribution;
The spouse regularly participates in and is involved with the business; or
The spouse conducts business or interacts with the public on behalf of the LLC.
Make a Spouse a Member of the LLC

When a spouse frequently works in an LLC, one of the best ways to avoid personal liability is to make the spouse a member. An LLC can add new members by following the terms of the "operating agreement." The operating agreement, the document created when the LLC was set up, defines important terms about the management of the company.

In general, operating agreements require all members to agree to the addition of a new member. After the addition of a member, a limited liability company must amend the operating agreement to reflect the changes to the members' interests in voting, profits, and losses. To avoid complications with the IRS, the spouse's voting rights and the rights to profits should reflect more than a zero percent interest.

making your spouse a member will require a means for splitting the net income because a partnership return must be filed.  each of you'll get a k-1 reporting your share of the profits. like you she does not receive a salary.   

because we don't know all the facts in your situation you should sit down with a tax pro who can advise as to the best alternative.

[AmeliesUncle]

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@2793933 wrote:

I'm paying myself a salary

my wife began helping with the business, she's involved in keeping financial records, answering phone calls and marketing ... should I make her and employee of the business? or should she become a 1099 employee?   

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You aren't paying yourself wages and filing employer forms, are you?  A Sole Proprietor can not be receiving "wages" that would show up on a W-2.  As was noted above, your income is the full profit of the business.

As for your wife, IF you do anything, most likely she would be an employee (W-2), not an Independent Contractor (1099).  But hiring an employee is a lot of work and expense (payroll forms, unemployment compensation, worker's compensation, etc.).

Sitting down face-to-face with a tax professional that can analyze the entire situation may be a good idea.

[2793933]

Sorry what I meant is, I draw money from the businnes for all of our expenses not related to the business. I see it as a salary but that was probably the wrong term to use. Also we file taxes Jointly,

[2793933]

Sorry what I meant is, I draw money from the businnes for all of our expenses not related to the business. I see it as a salary but that was probably the wrong term to use. Also we file taxes Jointly,

[Opus 17]

you probably need to speak to a tax advisor.

Why did you form an LLC in the first place? If you had an unincorporated business, and your wife materially participates, then you could treat it as a disregarded entity, and both you and your wife would file a schedule C and each report a share of the income and expenses according to the degree of participation.  This will be the simplest way to record earned income for your spouse and get those employment credits into the Social Security system, to help qualify her for disability and retirement benefits.  From a tax point of you, your simplest option is to dissolve the LLC, but this goes back to my question of why did you form one in the purpose? LLCs do not necessarily provide the same liability protection to sole proprietors as you might think, and this is where you might need professional advice.

having formed an LLC, you may wish to consider adding her to the LLC. However, unless you live in a community property state, this will cause you to have to file a business return form 1065 instead of including the LLC on a schedule C on your personal return.

I am not aware of what regulation says that you can’t pay your wife as a subcontractor, but other people have said this is not a good idea, so there may be something I don’t know. Paying her as an employee is also an option. The paperwork burden for a single employee is not as onerous as others make it seem, but it will probably take an hour or two a month, that might be more profitably spent doing other things.  There are payroll services who will handle the paperwork for you for an additional fee of course. If you do hire your wife as an employee, you need to be aware that you will have to follow all of your state laws regarding minimum-wage, hours and break time, unemployment insurance, and any other mandatory benefits or rules that must be followed in your state.