 Looking at the income tax formula, we're focused online, one that being income. Remembering that the first half of the income tax formula is in essence an income statement. Although it's also an outline, a form of scaffolding, many other forms and schedules flowing into it, this half of the income tax equation in essence representing page one of the form 1040. When we're looking at the income line, one of the things that will flow into it would be the Schedule C, the Schedule C being an entire income statement in essence in and of itself, income minus expenses, the expenses basically being the business deductions. Looking at form 1040, we're here online, eight other income from Schedule 1. This flowed in from the Schedule C to Schedule 1 to first page of the 1040. The net income, not the gross income, here's a Schedule C, which is in essence an income statement, income minus expenses, the net is what flowed through the Schedule 1 and to the 1040. So now let's think about a situation where we have a business owned and operated by spouses. So in other words, when we think about a sole proprietorship, we typically think of one individual that's starting a business. One individual, for example, that starts a hot dog stand is for tax purposes in essence automatically a sole proprietorship because they started generating money and they didn't incorporate or have some other form of operation and therefore they're a sole proprietorship and the IRS wants a piece of that hot dog stand. But if you have two or more people that started the hot dog stand, now you are in essence a partnership. You're just doing a profit sharing situation with two or more people. The problem is you can't just report that information on the Schedule C because you have different people reporting different Schedule C's and therefore normally you have to report a partnership return, which is a flow through type of entity, meaning you're not taxed on the partnership level, but rather you have to do a partnership information return in order to generate the K-1's which are kind of like W-2's from the partnership in a sense that they're going to report your income except it's going to be the full income that flows in through to the partners who can then use the K-1's to report their share of the income on their forms 1040. But what about a marriage situation? That's an interesting situation because the general idea would be for tax purposes you had one entity or two separate entities to start with and then they got married. So they should be one taxable entity. They were two, now they're one. Isn't that the blessing of marriage and whatnot? But for taxes it gets a little bit more messy than that in part not just because of the income tax situation because you might say, well, who cares if the income is received by one spouse versus the other spouse it's going to be reported on their joint income tax return possibly. However, the social security becomes an issue because when you report the income for a sole proprietorship on a schedule C you're also going to have to be paying the social security taxes and you might say, well, who cares? It's going to be one entity paying the social security tax and it's the same rate, same cost but the benefit of paying into the social security program will result in you getting social security payments calculated at the end of the social security program and that is based not on a marriage basis but on an individual's basis meaning it's laid out by person by social security number. So that becomes an issue. How are we going to be allocating the income that's being paid for the self-employment tax obviously from a tax planning standpoint, we would like to do so. So it maximizes the amount of social security benefits that we're going to be receiving at social security time. So we have that to deal with as well. So when we have this partnership spouse with one business, those are some of the issues that cause some of these problems. So if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses you are partners in a partnership whether or not you have a formal partnership agreement. Now note that whenever you go into business like if you just started your hot dog stand with two or more people and you didn't make any other agreement then you might just have a verbal agreement or you might basically just split the revenue evenly through however many of you there are but clearly it would be much better to set up any formal agreement and people often kind of don't do this with people that they know like family for example because they just assume that their family members can read their mind because they're so close in this knot and that's in my opinion and in my experience a horrible idea. You want to lay out exactly what everybody basically is expecting from the partnership so everybody's on the same page and we don't have any kind of bad feelings that people are being taken advantage of within any kind of partnership arrangement and I would think that would a marriage if you could be more open about that kind of partnership in terms of what your expectations are and what you're looking for then that would be good but obviously if you're a married couple even that's going into a business setting it's quite natural to think well my spouse can read my mind and so we don't need a formal agreement but you probably want a formal agreement just to make sure everyone's on the same page here.