So, you are considering hiring your spouse to work within your company. It might be that you are having trouble with extremely low staffing numbers due to the virus shutdowns. Or might be because you need additional “temp help” because you are growing quickly. Either way, such a move might present you with a golden opportunity with a variety of previously untapped benefits. Let’s talk about why hiring your wife or husband may just be a great staffing and financial option!
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Before I begin, let me suggest that you discuss this topic with your tax advisor and your financial advisor. Depending on the type of entity your business was set up as, some of these points may not be possible.
The number one reason I recommend putting your spouse on your business’s payroll is so that you can maximize your retirement benefits. As of 2019, employees can contribute up to $19,000 into their 401(k) plans or up to $25,000 if they are over the age of fifty.
So let’s say that Fred and Tina are a married couple in their fifties, and Tina owns a business. In our example, Tina makes $100,000 a year in income from the business, and she contributes $25,000 into her 401(k). Through profit sharing, a Safe Harbor Match, or a pure match, the company matches her contribution of $25,000. Therefore, she has a total of $50,000 going into her 401(k) each year.
Yet, what happens if we hire her husband Fred as an employee and add him to the payroll? Fred and Tina don’t need more than $100,000 coming home, so let’s split their income. We’ll pay Tina $70,000, and we’ll pay Fred $30,000. Now, both Tina and Fred can contribute $25,000 into their 401(k) retirement accounts; Tina contributes $25,000, and Fred contributes $25,000. To keep it simple, we’ll keep the company’s match at $25,000, but we’ll split it between Fred and Tina. Thus, Tina gets $17,500, and Fred gets $7,500 of 401(k) matching funds from the company. If you add all of that together, a total of $75,000 goes into Fred and Tina’s 401(k) accounts. That’s $25,000 more than Tina alone could contribute!
Another reason you may want to add your spouse to the company’s payroll is for health insurance benefits. Yes, you can add your spouse to your health insurance plan as a dependent, so your spouse doesn’t necessarily need their own plan. However, some health insurance plans offer cheaper premiums if your spouse is listed as an employee instead of a dependent.
Besides lower health insurance premiums, you could also receive Health Reimbursement Account (HRA) benefits if your spouse is on the payroll AND if you operate the company as a sole proprietorship or a C Corporation. If your business is one of those entities, your company can reimburse you and your employed spouse for all of your out-of-pocket medical expenses and health insurance premiums. Then, the company can claim all of those reimbursements as business tax deductions! That’s a win-win in my book.
However, there are some basic rules you need to know about with an HRA:
To max out your Social Security benefits, you would bring home approximately $129,000 yearly from your business. If you push $130,000 for 10 years, then you’re fully qualified, or fully insured, and your non-working spouse is then eligible for 50% of the working spouse’s benefits. That’s pretty amazing, and most people don’t realize that a non-working spouse is eligible for 50% of the working spouse’s Social Security Benefits.
However, you can utilize strategies to maximize your Social Security benefits and your spouse’s. With the help of tax consultants and planners, you may be able to shift your income and duties to your spouse after a ten-year period and let your spouse maximize Social Security credits for ten years. This gets very complicated, so be sure to seek professional guidance before you employ any Social Security strategies.
If you travel for work, you can bring your spouse with you. Of course, you have to have legitimate reasons to bring your spouse with you. However, if your spouse travels as your chauffeur, your assistant, your scheduler, or the like, you may be able to deduct your travel expenses and your spouse’s expenses from your tax liabilities. That benefits both you and your business.
Many times, non-working spouses are not insured under disability policies. Yet, if you hire your wife, you can now get disability benefits for her. Obviously, you hope your spouse never needs those benefits, but if your spouse legitimately works for the company, then he or she can receive the benefits if needed.
Another benefit of hiring a spouse as an employee of your company is that you can potentially buy a third vehicle for your spouse as part of his or her job duties. You probably have a vehicle for you, and most likely, it’s a business expense. Then, at home, you have a family car. But if your spouse is an employee, you might be able to purchase a third vehicle that is used for business purposes and create another deductible business expense.
If you operate your business as a C Corporation, you fall under double taxation, where your income is taxed at the corporate level and on a personal level. By hiring your spouse, you can reduce your taxable income and lower some of the taxes that are double taxed. Obviously, that’s a benefit to you and your business. Keep in mind that if your spouse also has a “9-5 job” you should watch for any salary increases or bonuses as they might have negative tax ramifications.
Finally, you could send your spouse back to school and deduct the education expenses from your taxable income. However, if you do this, be sure you’re sending your spouse to school to improve the job skills they are using within your company. If your spouse does bookkeeping work for your business, don’t send them to school for a degree in theater arts. Be smart, friends.
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Yes, your spouse as an employee can offer you and your company benefits – financial and otherwise. However, I need you to understand that I’m not telling you to put your spouse on the business’ payroll simply to make more money. If you hire your spouse, they MUST have a legitimate job within the company just like any other employee. You are not trying to “trick” the government and give your spouse money from your business for no reason. That’s ridiculous AND it’s dishonest. If you are going to pay your spouse, it must be done right.
The goal of this article is to give you ideas that might work for you and your company. However, you should talk to your CPA or your tax advisor before you put any of these ideas into practice. I did my best to give you ideas that are legitimate in every state, but there may be state-specific laws or rules that I am not aware of. If your CPA doesn’t offer you tax mitigation ideas like hiring a spouse, employing your children, etc., reach out to me. I work with forward-thinking CPAs all over the country whom I know and trust. I can put you in touch with one of them.