9.2.3 Self-Employment Income

Net self-employment income is community property. Generally, community property rules will govern regular income tax liability and require the non-earning spouse to include one-half of the earning spouse’s income in any separate tax return. However, even in a community property state, self-employment income will be allocated entirely to the self-employed spouse for the purposes of self-employment tax.1  In other words, community property law is disregarded for the purposes of calculating self-employment taxes. This rule can provide significant tax relief for the non-earning spouse because self-employment tax is often about 60% of the tax liability faced by low-income taxpayers.

• 1I.R.C. § 1402 (a)(5); 26 C.F.R. § 1.1402 (a)(8); IRM § 25.18.2.2; Charlton v. Comm’r, 114 T.C. 333; Davis v. Comm’r, T.C. Memo 1989-46; Gilliam v. Comm’r, 60 F. App’x 720 (10th Cir. 2003).