Hiring your spouse can mean big tax savings but not if you don’t do it correctly. Here’s what you need to know.
Compensate Your Spouse Primarily in Tax-Free Employee Benefits, Not Taxable Wages. Cash wages are fully taxable so concentrate your spouse’s compensation entirely or mostly with tax-free benefits (such as health insurance), which are a deductible expense for you as your spouse’s employer. This results in real tax savings and eliminates payroll tax and a W2 for your spouse.
In most states, the minimum wage laws and federal and state unemployment taxes don’t apply when a sole proprietor business owner hires his or her spouse as an employee. If you have a corporation or an LLC, those laws DO apply when your business entity, not you as an individual business owner, hires your spouse.
You don’t have to pay your spouse cash wages to deduct the employee fringe benefits that you pay but you are required to prove your spouse is your bona fide employee and receives reasonable compensation.
Spousal Health Insurance. If your spouse is the only employee of your business, you can establish a spousal health reimbursement arrangement, what we call a “105-HRA” to pay for health expenses and it will not be subject to Affordable Care Act (ACA) restrictions.
You can also provide certain job-related education benefits. Employers may provide employees with up to $50,000 in group term life insurance coverage tax-free.
Working conditions fringe benefits that help your spouse do his or her job can be deducted such as the cost of a smartphone your spouse uses for business purposes. Your spouse doesn’t have to use the phone solely for business purposes or to keep records.
An ounce of planning is worth a pound of cure: Please consult your tax planner and state regulations before setting up your Spousal Hiring Plan in order to get maximum tax benefits and minimal IRS scrutiny.