In the world of small business, the idea of hiring your spouse might be appealing. It's a decision that has far-reaching implications, and often times people jump to it or avoid it without thinking about the tax impact. In this blog post, we'll explore the tax advantages and disadvantages of making your spouse a part of your business.

First things first, there is absolutely no tax savings in putting your spouse on payroll and paying them wages. If you pay your spouse wages you are simply moving income from one area of your return to another and in some cases potentially paying more in tax than necessary. The true gold in hiring your spouse occurs when paying them "benefits", specifically tax-free employee benefits, versus wages.

When Should I Hire My Spouse?

There are three main tax saving opportunities where we recommend hiring your spouse in your business: retirement planning, health costs, and fringe benefits. Lets explore each of those:

• Maximize Retirement Contributions
  • If you, as the business owner, are already maxing out your retirement contributions and you are looking to put even more away, hiring your spouse to contribute to your business retirement plan as well could be a great option. 
  • Imagine you are an S Corp owner and have a Solo 401k in place. You can max out the employEE portion and the employER match based on your salary but that might not be enough of what you want to put away. By hiring your spouse you could then have them max out the employEE portion and get the employER match as well which would be a significant increase to the amount you can put away towards retirement.
• High Health Costs (Over and Above Insurance)
  • If you are in a situation where you have high out of pocket medical costs, hiring your spouse may be a great way to get a business deduction for those items.
  • Awhile back in our healthcare series we did an episode on a Section 105 or HRA plan. You can find more details on that here, What Options Are Available to Business Owners With High Medical Costs?
  • A Section 105 or HRA plan is a way to turn personal medical expenses into a business deduction. There are some qualifications but hiring your spouse is way to accomplish this. If you have other employees this would not be an option. If you operate as an S Corporation you would need to do a workaround. These can get a little more technical so you want to ensure you are doing them right. Check out our article for more on that.
• Fringe Benefits
  • Life Insurance
    • Businesses can provide their employees up to $50,000 in group term life insurance tax-free.
  • Working Condition Benefits
    • These would be items that help your spouse do their job. Think of things like a cell phone or computer.
  • De Minimis Fringe Benefits
    • These would be low cost (~$70 or less) and not frequent gifts you give to your employees. Think of things like holiday, birthday, performance, etc. 
    • Examples: Meals or snacks, flowers, fruit, or similar items provided under special circumstances.

When it comes to reasons to hire your spouse we traditionally lean specifically on maximizing retirement and high health costs. We would not recommend fringe benefits being the sole reason to hire your spouse and if that was the only benefit you could use, then we'd instead recommend having them as a board member and taking advantage of some of those there.

How Do I Support Hiring My Spouse?

If you are going to hire your spouse they must be an actual employee of your business and you must be paying them a reasonable rate. You cannot just provide these benefits without your spouse actually earning it. Here are some items you should be considering to ensure you are doing this right:

1. Spouse Does Actual Work: You will want to document exactly what your spouse is doing and how much time they are putting in. We typically recommend having a timesheet setup for this.
2. Pay Spouse Reasonable Rate: Based on what your spouse is doing and the time they are putting in you want to ensure the amount you are paying is reasonable for that work.
3. Spouse Gets Paid: If you are utilizing this strategy for health related costs you want to ensure that your spouse is paying for the health costs and then based on the Section 105 or HRA Plan you have setup you are them reimbursing them.
4. Spouse is Non-Owner: If you are operating your business as a sole proprietorship, Single Member LLC, or partnership you would want to ensure your spouse is not an owner if you are hiring them.

Hiring your spouse can lead to great tax savings in certain situations but you want to first ensure it makes sense for your situation and then ensure you are dotting your i's and crossing your t's and doing things the right way.

The Tax Disadvantages of Hiring Your Spouse

1. Increased Payroll Taxes: Hiring a spouse may increase your payroll taxes. You'll need to pay Social Security, Medicare, and possibly unemployment taxes on their wages. However, if paying them with tax-free employee benefits this is often not a downside. From a retirement planning opportunity the tax savings could outweigh these added costs.
2. Potential Audit Risk: As with all tax strategies, you need to do it right and ensure you have all of the supporting documents. Paying a salary that's disproportionately high could attract unwanted attention.

Navigating the Decision

The decision to hire your spouse shouldn't be taken lightly. It's important to understand the tax implications thoroughly and how they fit into your overall business strategy.

Generally stating, simply hiring your spouse and paying them wages gives you no tax advantage and actually could cost you more in taxes. There are two main reasons we would recommend hiring your spouse. 

1. Maximize Retirement Contributions
2. High Health Costs (Over and Above Insurance)

In conclusion, hiring your spouse in your business can offer notable tax advantages, but if you do it for the wrong reasons could also cost your more in taxes. Do not get into the trap thinking that paying your spouse wages decreases business income and saves your taxes. By considering these factors carefully and seeking professional advice, you can make a decision that benefits both your business's bottom line and your personal relationship.