You’re married. You own a business. Your spouse works as an employee in someone else’s company and receives a Form W-2 reporting his or her employment income. Or, vice versa.
Does this affect the personal tax return you and your spouse file? Yes, it does.
We’ll assume you and your spouse file a joint tax return, as almost all married people do. Here are a few advantages to consider for married couples filing separate returns.
If one spouse individually owns a business and operates it himself or herself, the business-owner spouse is a sole proprietor. This scenario means he or she owns the business.
Such a spouse is also ordinarily treated as a sole proprietor if he or she forms a one-owner limited liability company (LLC) to run the business.
The fact that the business-owner spouse is married doesn’t make much difference as far as business taxes go. The owner-spouse gets treated like any other sole proprietor.
The owner gets to deduct any ordinary and necessary expenses incurred to run the business. Examples include business travel and mileage, an outside or home office, equipment, business insurance, and other business expenses.
But, the fact that one spouse is an employee can have a considerable impact on one important business deduction. That is to say, the first-year expensing deduction. This deduction is also called the Section 179 deduction, based upon the Internal Revenue Code section establishing it.
Section 179 allows you to deduct the full cost of equipment and other long-term assets in a single year rather than depreciating it over several years. But, you may deduct no more than your net taxable business income for the year. If the value of the assets you purchase exceeds your net business income, you have to deduct the excess amount in the following years.
However, for Section 179 purposes, net business income includes your spouse’s employee income. So, if your business income is low, you can add your spouse’s employment income to it to increase your Section 179 deduction for the year.
When one spouse owns a business, the couple will have a more complicated tax return. The business-owner spouse must file the following forms with the couple’s joint return to report and pay taxes on the income the business earns:
The owner-spouse files IRS Schedule C, Profit or Loss From Business, with the joint tax return. The owner-spouse is the only one listed as the business owner on Schedule C.
In this form, the owner-spouse lists all his or her business income and deductible expenses. The form has preprinted categories for the most common deductions.
You deduct the total business expenses from the overall business income to determine if the business earned a taxable profit. If the company made a profit, you would list it on the first page of your Form 1040.
You add the profit to any other income both spouses earned. This amount includes the income the non-owner spouse made as an employee.
Both spouses are liable for paying the income tax due on their total taxable income shown in their Form 1040, including the owner-spouse’s business income.
If the business incurred a loss, you could deduct it from any other income either spouse earned. This calculation reduces the tax both spouses owe.
The owner-spouse must also report the business’s net profits on IRS Schedule SE, Self-Employment Tax. Again, you file this form only in the owner-spouse’s name. You complete this form to calculate the Social Security and Medicare taxes the owner-spouse owes on the profit the business earned. You must pay these taxes along with your income taxes. You add the amount to the income tax due on your Form 1040.
However, these self-employment taxes get paid only for the owner-spouse alone. That is, they apply only to the owner-spouse’s Social Security account. The non-owner spouse receives no credit for them.
Depending on the business deductions you claim, you may have to file other business tax forms with your return. For example, if you claim the home office deduction, you must submit IRS Form 8829, Expenses for Business Use of Your Home, with your return showing how you calculated the deduction.
Married couples also get to deduct an amount for certain personal expenses. There are two ways to do this—you can:
You may deduct the actual amount of certain expenses item by item. You must list all these deductions and their amounts on IRS Schedule A.
Itemized deductions are usually personal in nature and don’t include business expenses. The most common ones are:
You can’t deduct most of these expenses in full. For example, home mortgage interest on homes purchased from 2018 through 2025 may only be deducted on acquisition loans totaling $750,000 (it was $1 million under prior law). And you can deduct only a maximum of $10,000 for state and local taxes and property taxes.
The fact that one spouse has a business and the other works as an employee does not affect your itemized personal deductions. They are completely separate from the owner-spouse’s business deductions.
But, there is one big exception for home offices. If the business-owner spouse uses a home office for the business, he or she may claim the home office deduction. The place to claim this business deduction on Schedule C.
You must figure out how much of your home you use exclusively as a business office. You then deduct the home office percentage of your mortgage interest and property tax payments as part of this deduction on Schedule C.
If you do this, you and your spouse do not deduct this amount as an itemized deduction on Schedule A (you can’t deduct the same item twice). In other words, these amounts don’t count toward the limits on deducting property tax and home mortgage interest as a personal itemized deduction. This can increase your total deduction for these expenses.
Example: Ed and Edna are a married couple. Ed has a home business as a freelance app developer. Ed and Edna pay $12,000 per year in property tax on their home. Ed uses 25% of the home as an office for his business. This enables him to deduct $3,000 of his property tax (25%) as part of his home office deduction on his Schedule C.
Ed and Edna deduct the remaining $9,000 as a personal itemized deduction on their Schedule A. Had Ed not had a home office, the couple could have deducted only $10,000 of their $12,000 in property tax as a personal itemized deduction.
Personal itemized deductions are great if you have a lot of them. But most taxpayers don’t have that many. For this reason, 90 percent of all taxpayers take the standard deduction.
The standard deduction is a specified dollar amount you may deduct each year to account for otherwise deductible personal expenses such as medical expenses, home mortgage interest and property taxes, and charitable contributions. You take the standard deduction instead of deducting your actual personal expenses.
For the tax year 2019, the standard deduction amounts are as follows:
Filing status Standard Deduction AmountSingle$12,200Married, filing jointly$24,400Married, filing separately$12,200Head of household$18,350
The fact that one spouse has a business, and one is an employee has no impact on their standard deduction. If they file jointly, they get a $24,400 standard deduction. If they file separately, they each get half as much.
If a married couple claims the standard deduction, they get no separate deductions for their actual expenses for things like mortgage expenses and real estate taxes. But, the spouse with a business can still claim the home office deduction as a business deduction on Schedule C.