Does your spouse help out at your small business without pay? Some small corporation owners turn to their spouse as a cost-saving way to help with piecemeal projects such as marketing, delivery, or perhaps even bookkeeping or recordkeeping. Although wages are taxable and fringe benefits cost your company, you could be missing out on tax-saving opportunities for officially hiring your spouse.
Tax-Savvy Considerations for Hiring Your Spouse
Consider the following:
- You’re saving money in the company 401(k), but what about your spouse? If certain requirements are met, your spouse can contribute to the plan while the business deducts contributions made on his or her behalf. Frequently, your spouse can build a tidy nest egg within the tax law’s contribution limits.
- If you’re paying a hefty bill for your spouse’s health insurance coverage, hiring your spouse as an employee will likely save money. The amount of your company’s payment is deductible by the business — just like it is for any other employee — even if you’re self-employed.
- You typically can’t deduct your spouse’s travel expenses like you can for yourself if he or she is accompanying you on a business trip. However, if there’s a legitimate business reason for your spouse to make the trip, the travel expenses — such as airfare, hotels and 50 percent of the cost of meals — become deductible.
- Is your spouse planning to attend school to improve business skills? If he or she enrolls in courses through an educational assistance plan, the cost is generally deductible by your business. For the employee-spouse, annual benefits of up to $5,250 are exempt from tax.
- Does your business provide group-term life insurance coverage on a nondiscriminatory basis? Then you know the cost is deductible by the business and the first $50,000 of coverage is tax-free to employees. As a bona fide employee, your spouse can be covered under the plan.
- Qualified Business Income (QBI) from Tax Reform. Ren Cicalese III, CPA, MST explains that “Thanks to the new tax law, there may be some added benefit available should you decide to pay your spouse a wage. Under the Tax Cuts and Jobs Act, any business other than a C corporation is eligible for a deduction based on qualifying business income. It’s complicated formula, but one of the limitations for the deduction is based on wages. So if you haven’t paid a wage before, you may want to reconsider so that you can take this new deduction.”
- How does your C-Corp taxation compare to your individual rate? “If you are an owner in a C corporation, you can shift income to your spouse by paying him or her a wage. Generally, any income left in the corporation would be taxed at the corporate level. If you and your spouse are taxed at a lower rate than the corporation, paying wages to your spouse will likely provide some tax savings.” – Ren
- Are you thinking with the future in mind? Per Associate Partner Rich Middleton, CPA: “Hiring your spouse allows them to build up social security credits. The future retirement benefit will likely exceed the current deductible FICA tax cost.” Ren agrees, adding that “If your spouse hasn’t been receiving a wage from the business previously, he or she is not getting credit towards social security. Social security benefits are calculated based on wages, so paying your spouse a wage could increase the amount he or she receives.”
One small catch
S corporation owners generally can’t deduct fringe benefits for any employee owning 2 percent or more of the company. This prohibition extends to coverage for an owner’s spouse.
Adds Rich: “Remember to treat your spouse as any other employee in terms of work assignments and “reasonable” compensation for their position.” Click here for more tips on successfully employing family members in your business.
Your tax advisor can help you determine when it makes sense to put your spouse on the payroll. Contact an Alloy Silverstein CPA for additional guidance.
