If you are going into business for yourself and your spousewill help out, you don't need to hire your husband or wife as anemployee or independent contractor, nor do you need to form apartnership, LLC or corporation. If you follow certain guidelines, youcan continue to operate as a sole proprietorship (a one-ownerbusiness). Filing a joint returnIf your spouse will participate in your business, you canmaintain your sole-owner status by filing a joint tax return at the endof the year. On your joint return, you simply list all of your businessincome on Schedule C. The IRS then treats all of your business incomeas belonging to both of you, and you'll have just one tax bill. Whiletechnically, the IRS expects sole proprietorships to have just oneowner, it is quite common for mom and pop businesses to work this way. Filing a joint return allows you and your spouse to own abusiness without forming a partnership -- and dealing with morecomplicated partnership taxes. Also, it permits your spouse to provideservices for the business without being classified as an employee,freeing the business from the expense of payroll taxes. This set-up notonly saves you money but, if you have no other employees, it alsoallows you to avoid the time-consuming recordkeeping that comes withbeing an employer.
When you use a joint tax return, your business still has justone formal owner for IRS purposes -- that is, whoever is listed onSchedule C and on the business registration forms you file with yourcity or county. But keep in mind that, in most states, you and yourspouse each own part of the company because marital property laws giveyour spouse a share in your business.
Filing separate tax returns
If you and your spouse file separate tax returns, your spousecan still participate in your sole proprietorship. Your spouse simplydoes "volunteer" work (without pay) for your business. But be advisedthat volunteers don't rack up credit in their Social Security accountsfor the time they spend working without pay.
Choosing equal ownership
If you and your spouse both want formal ownership of yourcompany, each with an official say in management and a distinct shareof the business's profits and losses, you should create a business thatallows two formal owners -- such as a partnership, LLC or corporation-- even though this will mean filing more complicated tax returns andother business paperwork.
Source: Money & Work