Gather both you and your spouse’s W-2’s and any other community income for preparation.
- Create an entry into our program for each of the W-2's for both you and your spouse's community income. Example: you should have an entry for each of your W-2 form(s) and for each of your spouse's W-2 form(s) under your name.
- You will be required to claim half of the total income and half the total tax withholding for each W-2 on your return. Change the amount in Box 1 to reflect one-half of the total community income for wages. Change the amount in Box 2 to reflect one-half of the total federal tax withholding. If the W-2s are originally the spouse's W-2s, leave boxes 3-6 blank. If the W-2 is issued to you, report boxes 3-6 as it was reported on your W-2.
- If you have any other community income besides your W-2’s, please change those amounts to reflect your new community income, one-half of the income.
- Once you have completed the steps above, please complete the Married Filing Separately Allocations Form 8958. This form will explain to the IRS why the taxable income and withholding listed on the W-2 and other income are listed differently than the original forms.
How to Enter Self‑Employment Income or Loss in a Community Property State (MFS)
When Only One Spouse Runs the Business
Step One: The operating spouse enters the full Schedule C
On the return of the spouse who operates the business:
- Go to Schedule C
- Enter the full gross income and the full expenses
- The Schedule C will calculate the full net profit or loss
- This ensures SE tax is computed correctly (even if the spouses split the income for income‑tax purposes)
✅ This is required by IRS community property rules — SE tax must be based on all earnings from the business by the spouse who performed the work.
Step Two: Split the Schedule C income or loss using Other Income (operating spouse)
For a net profit:
Go to:
Federal → Income → Less Common Income → Other Income → Other Income
Enter:
- Description: “MFS Community Property Allocation – Schedule C”
- Amount: ½ of the Schedule C profit as a NEGATIVE number
This subtracts the other spouse’s share of community income from the operating spouse’s taxable income without affecting SE tax.
For a net loss:
Use the same steps, but:
- Enter ½ of the net loss as a POSITIVE number
(because you must remove the other spouse’s share of the community loss)
✅ This ensures the operating spouse reports only their half of the community loss for income‑tax purposes.
Step Three: The non‑operating spouse enters their share on separate return
On the spouse who does NOT run the business:
- Do NOT create a Schedule C
- Go to:
Federal → Income → Less Common Income → Other Income → Other Income
Enter:
- Description: “MFS Allocation of Self‑Employment Income (or Loss)”
-
Amount:
- +½ of the Schedule C profit, OR
- –½ of the Schedule C loss
✅ Profit is entered as a positive number
✅ Loss is entered as a negative number
This adds the spouse’s share of the community income (or loss) to their return.
When There Is a Net Loss (How to Claim a Community Property Loss)
If the business has a net Schedule C loss, the loss is also community property and must be split 50/50 unless a separate‑property exception applies.
✅ Operating spouse:
- Schedule C shows the full loss
- SE tax will be zero (correct)
- To allocate the community portion away, the operating spouse must enter:
- +½ of the loss as positive Other Income
This removes the non‑operating spouse’s share from their return.
Example:
Schedule C loss = –$4,000
Operating spouse enters +$2,000 in Other Income.
✅ Non‑operating spouse on separate return
- Enters –½ of the loss (negative number) in Other Income
This adds their share of the community loss and reduces their taxable income.
Example:
Non‑operating spouse enters –$2,000.
✅ Effect of a community property loss
- The loss is allowed and split correctly
- SE tax is unaffected (since a loss produces no SE tax)
- Each spouse receives the correct share of the community loss
When BOTH spouses operate the business
If both spouses materially participate:
- Each spouse creates a separate Schedule C
- Each Schedule C reports ½ of the total income and ½ of the total expenses
This creates two smaller Schedule Cs that correctly split:
✅ Income
✅ Expenses
✅ SE tax liability
No “Other Income” adjustments are required when the business is jointly operated.
I don't know my spouse's information. What do I do?
If spouses divorce or separate, check the IRS filing status guidelines to determine if you are required to file a return as a married individual or if you can filed as unmarried.
- If you can file as unmarried select the filing status that you qualify for. You can use the IRS interactive tool if you are not sure which filing status to choose.
- If you are required to file as married, the other spouse's information is required to electronically file the return.
My spouse does not live in or earn income in a community property state. Is the spouse's income considered community property income?
In a community property state, if one spouse lives in the community property state while the other lives and earns income in a non-community property state, the income earned by the spouse in the non-community property state would generally not be considered community income for federal tax purposes. Therefore, it would not be subject to splitting on Form 8958 when filing Married Filing Separately. The laws of the state where the taxpayer is domiciled govern whether income is community or separate for federal tax purposes. Please refer to the state instructions for more information.
Program entry
- Federal Section
- Miscellaneous Forms
- Allocation of Tax Amounts for Individuals in Certain States, Reported on Form 8958 - Married Filing Separately Allocations - Enter your spouse’s half of the community income within the applicable fields.
Please refer to Pub 555 for more information.