By: Cindy Toran, MBA, BA
There are potential advantages and disadvantages to formally hiring your spouse if you own a small business as a sole proprietor or single-member LLC. Keep in mind that you can only do so if he or she plays a bona fide role in providing services to your business, such as office work or marketing.
The disadvantage to hiring your spouse is that it may result in added employment tax filing (such as FICA, Medicare, but not FUTA). However, this also reduces taxable income.
Advantages to Hiring Your Spouse
- Your spouse is able to build up Social Security benefits.
- Reduction in self-employment tax for sole proprietor (15.3% up to $117,000 earnings for 2014). However, 50% of the amount paid reduces the Adjusted Gross Income (AGI). This could impact other tax deductions.
- Your spouse can be provided health insurance coverage that includes all family members (including the sole proprietor).
NOTE: This can be a significant advantage. If you are hiring your spouse as your only employee, this will provide the maximum benefit. This fringe benefit will reduce both income tax and self-employment tax.
Here is how the last advantage works for hiring your spouse. There is a 100% tax deduction for the following medical expenses for the employee and family (including the employer’s spouse):
- Health insurance premiums
- Uninsured medical, dental and vision care expenses
- Other deductible benefits, such as premiums for term life insurance up to $50K, accident and disability.
Thus, all medical expenses and insurance premiums would be 100% deductible expenses of the business, assuming the total compensation package is considered reasonable for the duties being performed.
Keep in mind, however, that ALL employees must be offered the same benefits.
Here is an example:
John is a self-employed consultant with no employees. John hires his spouse, Peggy. Peggy’s job description is to perform bookkeeping and research duties for John.
An employment contract is prepared. The contract states that Peggy will receive $20 per hour. John prepared a written medical reimbursement plan. The plan states the following: “The employer will reimburse all employees for medical care expenses of each employee, his or her spouse and his or her dependents.”
John paid Peggy $16,000 in wages in 2014 for 800 hours of work. He also filed all employment tax returns. John reimbursed Peggy $9,000 by check for medical expenses. These included doctor and dentist bills not covered by health insurance. These medical expenses were incurred during 2014.
Peggy’s salary, payroll taxes, and the medical reimbursement are all valid business expenses.
What about you?
If this scenario fits your small business, do some calculations to see if you would benefit financially from hiring your spouse. Also, check with a trusted tax professional to be sure you meet all qualifications.
Do you have a trusted tax professional?
Maybe you are too busy to work through the calculations for how hiring your spouse may affect your tax returns. Perhaps you are at a place in your business you need tax advice. Do you have thoughts, questions or concerns regarding this subject? Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.