When both spouses in a married couple are involved in the operation of an unincorporated business, it is fairly common – but incorrect – for all of that business’s income to be reported on one spouse’s Schedule C.

In which case, the spouse not filing a Schedule C loses out on the chance to accumulate his or her own eligibility for Social Security benefits and the ability to fund a SEP account.

In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the non-Schedule C spouse has another source of earned income, the couple will not be allowed a childcare credit.

There are 2 ways to remedy this situation, either; (1) by filing a partnership or (2) a joint venture. 

If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C. In addition, when filing split Schedule Cs, be aware of the different allocation of income for purposes of retirement plans and the opportunity for both spouses to participate in IRAs and SE Retirement Plans.