Should You Employ Your Spouse for Financial and Tax Purposes?
There are some for whom family and business go together like music and lyrics. These business owners may have been part of a family business for generations, in which the business is passed down from parent to adult child, and include that adult child’s spouse, siblings, even extended family.
For others, mixing business and family sounds like a terrible idea. Perhaps the family members have tried working together before but found it to cause conflict and strife. Or maybe they’ve simply heard stories of how challenging it can be to work with family or spouses and haven’t wanted to take the risk.
Whichever camp you may fall into, the truth is that it can actually make good financial and business sense to employ your spouse—although you should always talk to a financial or tax advisor to see what makes the most sense for your particular situation. Here are a few reasons why.
Increase your retirement savings
One potential reason to hire your spouse and add them to your company’s payroll is, you can maximize your retirement savings.
Here’s an example of how it works. Let’s say Heather owns a business and makes $125,000. She contributes the maximum amount ($19,500 in 2021) to her 401(k), and because her business matches contributions, she receives another $19,500.
Then she hires her husband. If they don’t need more than $125,000 to live on, the two of them could split that salary, but the husband could also contribute up to $19,500 to his company 401(k) and receive the match, which in this case is split between them. That means an additional $19,500 per year going into their retirement account. But such splitting, distributions should be done after careful consideration of all the tax matters as per the IRS tax code.
Health insurance savings
If your business offers employee health insurance, it could be less expensive to cover your spouse through the employee plan rather than cover them as a dependent on your own plan.
What’s more, the cost of premiums for your spouse's health insurance that your business pays is deductible on your business taxes. Because the payments are not considered wages, they are also not subject to Social Security, Medicare, or federal income tax withholding.
Paying your spouse in benefits
If your primary goal is to realize some tax savings, and your spouse performs mainly occasional work for your business, it may make sense to pay him or her mainly in benefits, rather than in cash wages.
Because wages are fully taxable, hiring your spouse could result in additional costs—Social Security, Medicare, and federal income tax withholding—rather than savings.
However, as long as you’re paying your spouse a reasonable amount for the work they perform like you would do with an outside hire performing similar duties, you can still offer them whatever benefits your business offers its employees: health insurance, retirement savings, life insurance, etc.
Additional tax deductions
There are other situations in which you may be able to deduct some or all of your business expenses for you and your spouse.
For example, if you have to travel for business and you have a legitimate reason for bringing your spouse along, you can deduct those travel expenses for both of you.
It’s also possible that you could deduct the cost of a work vehicle for your spouse if you use a car for your business. This is possible only if you also have a family car that you and your spouse use for non-business.
Requirements for hiring your spouse as an employee
While the benefits of hiring your spouse can be many, it is not something you should do unless you can give them a legitimate job within your company.
An important point to consider is that your spouse cannot be both a co-owner and an employee. If your spouse co-owns any of your business’s assets, then the two of you are engaged in a partnership, rather than an employer-employee relationship.
This includes any business bank accounts that are in both of your names, as well as any contracts or government filings. Make sure these are in only your name if you’re considering hiring your spouse as an employee.
In order to be considered a legitimate employee, your spouse should have:
A job title
A salary or wage commensurate with the position (don’t be tempted to overpay them)
Any and all benefits that are offered to your other employees
Payroll deductions and withholding is taken out of their paychecks
Works under your direction and control like other employees
Employee duties that are real work. It’s a good idea to have your spouse track hours and tasks completed so that you can prove he or she is doing legitimate work for your business.
Hiring your spouse can have some real tax benefits for your business, depending on your particular situation. As with any major financial decision, you should discuss it with your financial advisor or tax advisor first.