A married couple can jointly own and operate a business as a sole proprietorship, under certain conditions. For tax purposes, your spouse is allowed to work for your sole proprietorship without being classified as an employee or as a business partner.

This setup, sometimes called a husband/wife sole proprietorship, offers some benefits in the taxes you'll owe and the paperwork you need to keep. For one, allowing your spouse to work for you without classifying him or her as an employee frees you from having to pay payroll tax. That not only saves you money but, if you have no other employees, also allows you to avoid the time-consuming record keeping involved in being an employer. Similarly, by not classifying your spouse as a partner or an independent contractor, he or she won't have to pay self-employment taxes, and your business won't have to file a partnership tax return.

There's no official title for a person who works for a spouse's sole proprietorship. Just accept the IRS's good graces for allowing the informal status - and don't ask questions.

The IRS's special rule about husband/wife sole proprietorships is designed to give some leeway to a sole proprietor who's married, by allowing the sole proprietor's spouse to work for the business without triggering tax requirements that normally apply to employees or business partners. It's not intended for spouses who want to share business decision making equally. If you and your spouse want to be active partners in a co-owned business, create a partnership. If your spouse tries to squeak by as a nonclassified worker in a husband/wife sole proprietorship when you're really working together as a partnership, if you're audited, the IRS might decide for itself that you're a partnership - and sock the spouse with back self-employment taxes.

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