Hint: There Are Benefits To Hiring your Spouse!
The age old question.. To Do… or Not To Do. So, we ask, should you or shouldn’t you hire your spouse? The truth is they probably are already working for you, they just aren’t getting paid for their services. If you make them a legitimate employee, there are some great tax-free fringe benefits available.
Here’s the caveat warning: When you hire your spouse, you are basically moving income from one spouse to the other spouse. In this situation, you will have to pay Social Security and Medicare taxes on their wages. Every year, there are limits on the amount of your earnings that are taxed by Social Security, which is 12.4%. For 2022, the limit is $147,000. If you are self employed and make $250,000, you only pay Social Security on $147,000. If you hire your spouse, you will then have to pay Social Security on those wages as well. Back to the example above: You decide to pay your spouse $30,000. Your profit will be $220,000 and will pay Social Security on $177,000 ($147,000 + $30,000). We mention this because, as with all benefits, they have to outweigh the cost.
We find that in many cases, the benefits still outweigh the cost. Now, on to the good stuff! What are the top benefits to hiring your spouse?
Health Insurance Premiums
If you pay for health insurance premiums, once you hire your spouse, you can place the insurance policy in their name. If you have the right type of plan in place, your business can reimburse your spouse for health insurance premiums and medical expenses for your entire family. These reimbursements would be considered an employee benefit expense and be fully deductible.
Your spouse holding the policy not only reduces your taxable income, but also reduces your Social Security and Medicare tax. If you can normally write off your self-employed health insurance premiums on your 1040, notice that the premiums do not reduce your Social Security and Medicare tax which is a 15% savings. You are also not allowed to deduct medical expenses on your personal return unless you itemize your deductions. This is a huge benefit.
We mentioned above that you will need to have the right plan in place. If you are self-employed and your spouse is your only employee, then a 105-HRA plan will work well. However, if you have multiple employees, make sure to check out the ICHRA (Individual Coverage Health Reimbursement Account).
Retirement Plan Participation
If you hire your spouse as an employee, they get the opportunity to participate in the business’s retirement plan. The amount your spouse can contribute depends on their income and the type of retirement plan your business has in place.
If you are self-employed and your spouse is your only employee, you can possibly have a Solo 401K. The Solo 401K will allow a maximum contribution of $61,000 each plus catch up contributions for over the age of 50.
If you have multiple employees, SIMPLE and SEP’s are the most common retirement plans amongst small businesses.
Other Small Benefits if you hire your spouse
- Your spouse will be exempt from FUTA tax.
- You can offer an employer provided cell phone.
- When traveling for business, you could possibly write off their expenses provided they have a business purpose.
Make sure to follow the rules if you hire your spouse: Don’t ignore this part!
- Reasonable Wage – Make sure that your spouse is being paid a reasonable wage for their duties. This wage would be what an average company would pay for the same job.
- Bonafide Employee – You need to treat your spouse as you would any other employee. Have them complete the required new employee paperwork, if you have an employee handbook, have them sign off on receiving it, the job responsibilities and agreed upon wage.
- Track the date, time and services performed. This one feels tedious, but it’s mandatory.
- Bank Account – when paying your spouse, it needs to be deposited into a personal bank account separate from the business.
Discussing tax benefits is exciting, but doesn’t cover the full story of working with your spouse. Check out this article for the gushy details. We’ll stick with math!