Spouse Earned Income

[David MacLennan]

Wanted to get some confirmation or input on the following hypothetical case: Husband has sole proprietor business and wife helps out. They have always filed a Sch C with a single Sch SE with the husbands name on the Sch SE. They now want to sponsor a Keogh plan with the wife participating.

I have always advised they must form a partnership or pay the wife a W-2 comp as an employee for her to participate in the plan, so that she has earned income. Filing 2 Schedule SE's is not an option, because if the husband and wife are in business together, the IRS would say they have a partnership and must file a partnership return (and the partnership K-1's would show earned income for both). Community property laws in Texas, CA, etc. don't impact this analysis, as the earned income is assigned to one spouse per the Sch SE instructions and Pub 533 on Community Property and Income.

Correct? Thoughts or comments? Thanks.