Let's say a family child care provider and her husband work side by side caring for children. The child care provider is self-employed (a sole proprietor) and reports all the profit from the business on her business tax return (Schedule C).
The child care provider will pay Social Security taxes on her profit. As a result, she will receive higher Social Security benefits when she retires.
Because the husband is not paying any Social Security taxes on this profit, his Social Security benefits will be lower when he retires.
Is there a way for the husband to earn higher Social Security benefits in this situation?
IRS rules allow a married couple in this situation to split the profit, pay Social Security taxes under both their names, and thus spread the future Social Security benefits between the two of them. This can be done without them filing as a partnership.
To do this, the husband and wife should each file a separate Schedule C. They would split the income and expenses on these two forms and each pay Social Security taxes under their own names. This will not increase the total Social Security taxes they will pay.
The two should split the income and expenses according to the amount of work they perform for the business. A husband who works two hours a week doing the record keeping should not claim 50% of the income and expenses.
The reason to file two Schedule Cs for the one business is to allow the husband to contribute more to his Social Security account, and later earn higher benefits. However, before taking this action I strongly recommend that you find out the long-term impact on the Social Security benefits for both you and your husband.
Social Security rules are complex. You qualify to receive Social Security benefits by working for at least ten years. If your husband also works, you can both receive Social Security benefits. If your husband dies you can receive some of his benefits. Depending on how much you and your husband have earned over the years, it may be more beneficial to have future earnings credited to your husband.
To find out what will be the impact of crediting the profit from your business to you alone or to split it between you and your husband, use the Social Security Retirement Estimator. Talk to someone at your local Social Security office if you are within five years of you or your spouse retiring. They can answer your questions to help you make the best decision.
You can only file two separate Schedule Cs if you are married under state law (including same sex couples) and filing jointly. Unmarried couples cannot do this. You cannot do this if you are a Limited Liability Company (LLC) or a corporation.
If you do this, parents can still pay you and therefore your husband does not need to obtain his own EIN. You don't have to put your husband's name on your child care license or contract. There doesn't have to be any change in how you operate your program.
If you hire employees, either you or your husband can pay the employment taxes. It will not affect the total amount of taxes your family will pay.
I would recommend you keep records (for at least two months each year) to show how many hours in a month each person is working. This will help you defend how you split the income and expenses if you are audited. If you each worked about the same number of hours, each of you would report 50% of the income and 50% of the expenses on their own Schedule C. It doesn't matter who actually paid for the expenses or if all the income was deposited into a checking account under your name only. If you do have a separate business checking account I would recommend putting both names on it.
You can stop filing two separate Schedule Cs in future years if you want to.
Tom Copeland - www.tomcopelandblog.com
Image credit: childcareresearch.org
For more information about claiming income and expenses, see my Family Child Care Record Keeping Guide.