Outside Consultant: Q&A on Small Business Tax

  • Updated: July 3, 2013 - 11:30 AM

question

My fiancé and I run a business together (buzzfarmers.com). For simplicity of tax and budgeting reasons, does it make sense for one of us to be a full-time employee instead of it being a partnership?

Amanda MacArthur

BuzzFarmers

Providence, R.I.

amanda@buzzfarmers.com

 

answer

Because your company name ends with “LLC” and you mention the alternative of being taxed as a “partnership,” I will presume that your business is registered as a limited liability company and that you are not considering electing to have the company treated as a corporation for tax purposes.

The most important consideration may be whether you both are currently owners or you both intend to be owners of this business in the future. Owners of an LLC are not considered employees of the business for tax purposes regardless of the work performed. Also, to have an employer-employee relationship, the employer must have a certain amount of control over the employee’s work activities.

Matters such as potential personal liability and who legally controls the business should also be considered. While no fun to discuss, protecting yourselves financially from the potential breakup of either the business or your upcoming marriage should be considered.

There can be tax advantages to hiring a fiancé and normally even more tax advantages when hiring a spouse. The potential savings that may go along with employee status may provide you with substantially more cash at the end of the day after considering taxes and compliance costs. Unfortunately, this column is too small to list all the potential benefits, let alone all the pros and cons or a comparison. Just remember to also think “big picture” and not merely focus on which approach will provide you with the lowest tax bill.

You may wish to see a CPA or other qualified professional who, with better knowledge of your situation and your objectives, can better advise you.

About the author

Steven E. Warren, CPA, MBT,

Director of taxation, Lehrman, Flom & Co., P.L.L.P; adjunct professor, University of St. Thomas Opus College of Business

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