Part 17: Spouses in Business Together — Tax Rules & Hidden Opportunities

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Spouses in Business Together — Tax Rules & Hidden Opportunities (2025)

Many home-business owners work alongside their spouses, but few understand the IRS rules that apply.
In 2025, the tax benefits can be significant — including retirement plan doubling, payroll strategies, and the special rules for Qualified Joint Ventures.
This guide explains how to structure the business correctly and avoid IRS pitfalls.



1️⃣ Ways Spouses Can Work Together Legally

According to Chapter 17, spouses can work together in one of three main ways:

  • ✔️ One spouse owns the business and the other is an employee
  • ✔️ Both spouses own the business as a partnership
  • ✔️ Both spouses elect to file as a Qualified Joint Venture (QJV)

Important: The method you choose determines payroll taxes, retirement contributions, and recordkeeping rules.

2️⃣ One Spouse as an Employee

When one spouse hires the other as an employee, the business must run payroll — but there are advantages.

Key rules:

  • ✔️ Wages must be reasonable
  • ✔️ Must issue W-2 each year
  • ✔️ Employer must withhold payroll taxes
  • ✔️ Health insurance can be offered as a tax-free benefit

💡 Example — Employee Spouse
Spouse works 10 hours/week for admin work.
Reasonable wage = $12,000/year.
✔️ Deductible as business wages
✔️ Spouse qualifies for retirement contributions

3️⃣ Partnership vs Qualified Joint Venture (QJV)

🔹 Partnership

If both spouses materially participate and jointly own the business, the IRS may treat it as a partnership.

  • ✔️ Must file Form 1065
  • ✔️ K-1 issued to both spouses
  • ✔️ SE tax applies separately for each spouse

🔹 Qualified Joint Venture (QJV)

QJV is available only for married couples filing jointly and operating a business together.

Advantages:

  • ✔️ No Form 1065 required
  • ✔️ Each spouse files their own Schedule C
  • ✔️ Reduces administrative burden
  • ✔️ Allows separate retirement contributions

2025 Reminder: Both spouses must materially participate to qualify for QJV status.

4️⃣ Retirement Plan Opportunities

Working together creates powerful retirement contribution strategies.

  • ✔️ Both spouses can contribute to Solo 401(k) plans
  • ✔️ Employer profit-sharing contributions can be doubled
  • ✔️ SEP IRA contributions available for each spouse
  • ✔️ Potential to shelter $100,000+ per year

💡 Example — Solo 401(k) for Two
Each spouse earns $45,000.
✔️ Each contributes $23,000 employee deferral
✔️ Employer contribution for each spouse up to 25% of income
Combined contributions can exceed $80,000.

5️⃣ Fringe Benefits & Health Insurance

When one spouse is an employee, the business may offer tax-free benefits:

  • ✔️ Health insurance coverage
  • ✔️ HSA contributions (if eligible)
  • ✔️ Education assistance

Note: Benefits must meet nondiscrimination rules for corporations.

6️⃣ Real Examples

💡 Example 1 — QJV Instead of Partnership
A married couple with a small Etsy shop avoids Form 1065 by electing QJV.
✔️ Each files Schedule C
✔️ Both get SE tax credit for Social Security earnings.

💡 Example 2 — Payroll Strategy
A consulting business hires the spouse to perform admin tasks.
✔️ Wages deductible
✔️ Increases household retirement contributions

💡 Example 3 — Equal Ownership
Two spouses operate a home bakery.
✔️ Treated as partnership unless QJV elected
✔️ Separate SE tax for each spouse

7️⃣ IRS Compliance Requirements

Required Documents:
• Proof of material participation
• Ownership records
• Payroll records (if employee spouse)
• 1099/1042-S reporting when needed
• Retirement plan calculations

Proper classification prevents penalties for misreporting income or misclassifying wages.

IRS Reference Links

📦 Small Business Essentials — Recommended Tools

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📚 Home Business Tax Deductions Series (2025)

  1. ① Is Your Home Business Really a Business?
  2. ② Do You Have a Profit Motive?
  3. ③ Can You Deduct Your Startup Costs?
  4. ④ Operating Expenses You Can Deduct
  5. ⑤ Section 179 & Bonus Depreciation
  6. ⑥ Home Office Deduction
  7. ⑦ The QBI 20% Deduction
  8. ⑧ Car & Local Travel Expenses
  9. ⑨ Out-of-Town Travel Rules
  10. ⑩ Inventory Rules
  11. ⑪ Employees vs. Contractors
  12. ⑫ Health Insurance & Medical Deductions
  13. ⑬ Retirement Plan Deductions
  14. ⑭ Additional Business Deductions
  15. ⑮ Crypto in Your Business
  16. ⑯ Recordkeeping & Accounting
  17. ⑰ Spouses in Business Together
  18. ⑱ How to Avoid an IRS Audit

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