Married and Running a Small Business Together? Here’s How to Cut Your Tax Bill

If you and your spouse jointly operate a profitable unincorporated small business, you may be facing some tricky tax challenges. Let’s unpack what’s going on and explore a few ways to save.

The “Partnership” Problem

When you and your spouse run a business together (that isn’t incorporated), the IRS generally treats it as a partnership for federal income tax purposes. That means:

• You must file an annual Form 1065 (U.S. Return of Partnership Income)

• Each spouse receives a Schedule K-1 showing their share of income, deductions, and credits

While this setup may seem harmless, it comes with extra compliance work and it can also increase your self-employment tax bill.

The Self-Employment Tax

Self-employment tax is how business owners pay into Social Security (SS) and Medicare. For 2025, the SE tax rate is:

12.4% for SS on the first $176,100 of net SE income + 2.9% for Medicare on all net SE income

Once you pass the Social Security cap, that portion stops — but the Medicare tax continues. And if your joint SE income exceeds $250,000, you’ll owe an additional 0.9% in Medicare tax, bringing that portion to 3.8%.

Here’s the kicker: both spouses owe SE tax on their share of partnership income.

Let’s look at an example. If you and your spouse each report $150,000 of net SE income ($300,000 total), your total SE tax bill would be about $45,900 ($150,000 × 15.3% × 2). And that’s before your regular federal income tax.

Three Tax-Saving Strategies

Fortunately, there are legitimate ways to reduce your SE tax exposure. Here are three to consider:

1. Treat your business as a sole proprietorship (in community property states)

If you live in a community property state, IRS guidance (Revenue Procedure 2002-69) allows you to treat your unincorporated spousal business as a sole proprietorship owned by one spouse — instead of a partnership.

This approach effectively allocates all the net SE income to one spouse, meaning only the first $176,100 of that income is subject to the 12.4% Social Security tax  — resulting in a lower overall SE tax.

2. Convert your Business to an S Corporation

If you’re not in a community property state, another option is to convert your business to an S corporation.

Here’s why that helps! Only wages paid to you and your spouse as shareholder-employees are subject to FICA taxes (Social Security and Medicare). The rest of the business income can be distributed as dividends, which are not subject to FICA.

The key is to pay yourselves reasonable — but not excessive — salaries. Be aware, S corps come with additional compliance and payroll requirements.

3. Make one spouse the business owner and the other an employee

A simpler alternative is to disband the partnership and operate as a sole proprietorship owned by one spouse. Then, hire the other spouse as an employee and pay a modest salary.

You’ll need to withhold 7.65% in FICA taxes from the employee-spouse’s paycheck and match that amount as the employer. But because the salary is smaller, the total FICA cost is much lower than the SE tax would have been.

Only one Schedule SE (for the owner-spouse) is required with your joint return, and the Social Security tax is capped at $176,100 for 2025.

Here’s a Bonus! Hiring your spouse can open the door to additional tax-advantaged benefits, like employer-sponsored retirement plan contributions.

Plan Ahead and Save Smart

Owning and operating a small business with your spouse can be rewarding, but the tax treatment can get complicated fast. With careful planning, you can reduce your SE tax exposure and simplify compliance.

We can help you evaluate the best strategy for your situation and implement it smoothly.