SE Tax for Schedule C Husband Wife Business

[GTS1101]

My wife and I live in a community property state which is California. We have been splitting the profits 50% each of our tax businness so each of us gets half credited to our SE earnings for the last few years. I have realized that this is not accurate. My wife does very little work in the business about 20 hrs a week answering phones scheduling appts running errands etc. I am the one doing 90% of the work in the business.

My question is can I be 100% owner of the business and put my wife as an employee only and issue a w-2 to her in a community property state?

IRS instructions for Sch C and IRS code says "If only one spouse participates in the business all of the income from that business is the SE earnings of the spouse who carried on the business."

"If both participate income and deductions are allocated to the spouse based on distributive shares."

If my wife works part time only 20 hrs a week would that be participating in the business as owner? Or can she be participating as an employee and not owner?

If possible we would like to make myself 100% owner of the business and my wife to be employee only. Remember this is a community property state.

Thanks for your input and opinions!

GTS1101

[PIGLEE]

I have done a 50/50 split for the SS when both work the same in a business. I have have transfered her share of the profits her C.

BUT if you do her as a W-2, you would then qualify for a Sec 105 (I think) Medical Reimbursement Plan. This is well worth the problems of making her a employee, and the payroll reports. I did this for years with my husband, saved us LOTS of money.

[appelman]

Community property considerations are largely irrelevant.

Community property allocations do not apply to Social Security and Medicare. I agree with Piglee that employing your wife with a reasonable salary is probably the most beneficial way to go.

[oceanlovin'ea]

My husband has been my employee for several years now. He had a full time job as an accountant for a large company. But he helped me in many little ways around the office and helped with making some of the decisions.
I pay him a monthly salary and have a medical reimbursement plan. It has worked great.

He retired the end of April and now he will be helping me even more in the business. I will let him do most of the bookkeeping accounts and I will concentrate on taxes.

And if he gives me trouble, its out the door for him! Just kidding.....he tries to be very helpful.

Linda, EA