Hire Your Spouse

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Hire Your Spouse

Sole proprietorships (and single-member LLCs taxed as proprietorships) don’t file a separate entity return. Instead, they report income and expenses directly on the owner’s personal return. These are the easiest entities to establish for startup and sideline businesses. However, most profitable businesses are likely to be better served by entities taxed as S corporations.

Here’s what you need to know about proprietorships:

• Income from proprietorships is taxed as ordinary income at up to 37%. It’s also subject to self-employment tax of 15.3% of the first $128,400 (2018), plus 2.9%-3.8% of anything above that.
• Income you earn in a proprietorship is treated as “Qualified Business Income.” You may be able to deduct up to 20% of that amount from your taxable income, subject to certain limits depending on the nature of the business and amount of the income.
• If you lose money in a proprietorship, you can use those losses to offset income from salaries, investments, and other business activities. If your proprietorship losses exceed the rest of your income for the year, you can carry the resulting “net operating loss” forward for up to 20 years into the future.
• As a sole proprietor, you’re considered “self-employed,” which means you don’t qualify for true employee benefits. However, you can still deduct 100% of your health insurance, and you can establish a wide range of retirement plans for yourself. You can create additional benefits by hiring your spouse as a bona fide employee — for example, while you can’t cover yourself under a medical expense reimbursement plan (because you’re not an employee), you can hire your spouse and establish a deductible plan for them.

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