Consider hiring your spouse as your company’s first employee.

For many taxpayers beginning a new business, there are always concerns and questions about decisions to be made.  How to finance the new endeavor, where to locate the office, and who to choose as the right advisors such as a CPA/attorney/IT consultant, etc.?  And being a new business owner, as you begin the process of moving forward with your new business, often your spouse is your initial “most trusted advisor” and “silent partner” with regard to the numerous business decisions you will face.

As the business grows, adding your spouse onto the company payroll also proves to be both a financial and tax advantageous move for a number of reasons; especially, if your spouse is not employed elsewhere.  The following examples provide a list of options for savvy small business owners to consider and to easily implement.

  • You can include your spouse in the company retirement plan, allowing additional retirement funding for the family while reducing your company’s taxable net income and resulting income tax.
  • Perhaps your spouse has been out for the workforce for a number of years, while being the principal caregiver to your children. Hiring your spouse as an employee may help him/her to reach the required 40 quarters of employment in order to qualify for social security benefits later in life.
  • The cost of your dining out together may become a tax-deductible expense. If business issues are discussed while dining out, keep a record of the business topics being discussed and you could include the dining expense with your spouse at a restaurant as a deductible meal expense.
  • Business travel may also become a deductible expense for your spouse. If you travel for a business-related event, typically the cost of your spouse joining you would not be tax deductible.  However, if your spouse travels with you as a true employee of your company and there is a bona fide business purpose to accompany you, then your spouse’s meal and travel costs would now become a deductible expense of your company in addition to your travel and meal costs.
  • If you are a Schedule C filer (sole proprietor or single-member LLC), your spouse’s wages are not subject to federal or state unemployment payroll taxes typically paid by the company.
  • If you are a Schedule C filer (sole proprietor or single-member LLC), have your spouse be the subscriber for the family health insurance plan offered by the company as an employee benefit. Although a self-employed Schedule C business owner is allowed an income tax deduction for health insurance premium payments, the premium payments do not reduce the self-employment taxes owed by the taxpayer.  However, if the plan subscriber is the spouse and the spouse qualifies as an employee of the business, then the health insurance premium payments made on the spouse’s behalf will reduce the business owner’s self-employment taxes.

A few items to note.  You should plan to pay your spouse ratable throughout the year and should not write one large check for the entire year near the end of the year.  You will need to issue a W-2 to your spouse for the wages paid throughout the year.  And although employing your spouse may increase the amount of overall social security taxes paid as a family and may also necessitate the hiring of a payroll service provider by your company, these additional costs typically will be outweighed by the tax and financial benefits noted above.