Whether your spouse should be a partner (member) or an employee in your LLC depends on your goals for ownership, taxes, and how involved they are in the business. Both options are legal, but they have different financial and legal implications.
If you’re running a business and want your spouse to be involved, you have two main paths: make them a co-owner (partner) of the LLC or hire them as a W-2 employee. Each approach has pros and cons related to control, taxes, and personal liability. The best choice depends on your long-term plans, how much authority you want to share, and how you want income to be taxed and reported.
Contents
1. What It Means to Make Your Spouse a Partner
When your spouse becomes a partner in your LLC, they are added as a member. They do not need to draw a salary, but they will legally share ownership of the company. This means they will be entitled to a portion of profits, losses, and business decisions based on your operating agreement.
In a partnership setup:
- Your LLC becomes a multi-member entity
- You must file IRS Form 1065 each year
- Each of you receives a Schedule K-1 to report your share of income on personal tax returns
- You both pay self-employment taxes on your share of profits
This structure makes sense if your spouse contributes to the business strategically or financially, or if you want them to have an ownership stake for long-term planning or succession.
2. What It Means to Hire Your Spouse as an Employee
In this case, your spouse is not an owner of the business. Instead, you pay them a salary and treat them like any other employee. You’ll need to:
- Set up payroll and withhold income, Social Security, and Medicare taxes
- Issue a W-2 at year-end
- Pay employer-side payroll taxes (unless you’re a sole proprietorship employing your child under 18)
Your spouse receives earned income and may qualify for benefits like health insurance, retirement contributions, and unemployment insurance. This approach works well if your spouse provides administrative, marketing, operations, or support services but doesn’t need ownership rights.
3. Tax Considerations
Making Your Spouse a Partner:
- Profits are reported on a K-1 and taxed as self-employment income
- No payroll taxes or withholding required
- Eligible for Qualified Business Income (QBI) deduction under pass-through rules
- Both spouses may contribute to retirement plans based on business income
Hiring Your Spouse as an Employee:
- They receive a regular paycheck subject to payroll taxes
- LLC can deduct salary and employer-side taxes as a business expense
- Can access employer-sponsored benefits like health insurance and retirement plans
- May be more favorable for fringe benefit deductions, especially in sole proprietorships
4. Legal and Administrative Implications
When you make your spouse a partner, they gain legal rights as a co-owner. This includes voting rights, profit-sharing, and decision-making authority. If your relationship changes or dissolves, their ownership interest may become a factor in divorce or estate matters.
As an employee, your spouse has no ownership or voting rights. Their role can be easily changed or terminated without affecting the structure of the LLC. This makes the business easier to manage and insulate from personal issues.
5. Consider Community Property Laws
If you live in a community property state (such as California, Texas, or Arizona), your spouse may already have a legal ownership interest in the business even if they’re not listed as a member. This can influence whether you treat them as a partner or employee for tax and planning purposes.
The IRS allows qualified joint ventures in these states, which let married couples file as sole proprietors instead of partnerships under certain conditions-simplifying taxes while sharing business income.
6. Choosing the Right Path
Consider making your spouse a partner if:
- You want to share ownership, profits, and long-term decision-making
- They contribute significant work, capital, or strategic value
- You want to plan for succession or shared liability
Consider hiring your spouse as an employee if:
- You want to keep full ownership and control
- You want to deduct their wages and provide tax-advantaged benefits
- They provide support services without needing ownership
There’s no one-size-fits-all answer. Whether your spouse should be a partner or employee in your LLC depends on your business structure, tax goals, and the nature of your relationship. Each path comes with unique tax treatment and legal considerations. Talk to a CPA or small business attorney to weigh your options carefully-and make sure your LLC’s documents reflect whichever arrangement you choose.
