Hiring Your Spouse

Certain sole proprietors are in a situation where they can justify having the spouse on the payroll. There are some tax savings to be had in these situations. Large amounts of money can be put away for retirement since, in some cases, you have doubled the allowable limits. A SIMPLE plan just by itself creates $9,000 in retirement savings on a spouse earning $10,000. Other, more extravagant, retirement plans can allow even higher amounts.

Other employee benefits, such as health insurance, can also be assigned to the spouse. You can save the 15% SE tax by having these employee benefits assigned to the spouse. HSAs or Medical Reimbursement Plans can also be used. Watch out for rules and paperwork. You need to follow the rules carefully to get the deduction. Having other employees can also add confusion, as they may have to be treated the same as the spouse. Examples of this are the Medical Reimbursement Plan or complex retirement plans. Health insurance plans can no longer discriminate. Health insurance companies have their own rules about who gets covered.

It’s also important to treat the spouse as a regular employee. Wages must be justified for the amount of work being performed. W-2s are required, along with all the related paperwork. Workers Comp Insurance may also be required. If you already have other employees, these costs and hassles may be negligible. If the spouse is the only employee, be sure you are saving enough in other areas to cover the added costs.

Try not to be too creative. It is hard to justify paying a spouse $40,000 when he/she already has a full-time job elsewhere. Wages must be appropriate for the work performed.

Children on the payroll are similar to the spouse. SE tax and income tax can be saved on minor children. You need to prove that they earned it. Four-year-old kids cannot answer the phone or file paperwork. Use common sense. The children and the spouse need to work for and earn whatever you pay them.