Should My Spouse be an Employee in My Business?
What are the benefits of hiring my spouse as an employee?
Many business owners have a spouse working in the business. Often, that spouse works for no pay or benefits, But, if your spouse works on a regular basis as an employee, you might consider putting your spouse on the payroll as an official employee, for several reasons.
Why Put Your Spouse on the Payroll?
If you have a compliant spouse who wants to help out and you have enough money coming in from the business and other sources, it might be tempting to have the spouse work in the business but not as an employee.
Your spouse may also be a part-owner of the business, and he or she may receive dividends (if the business is a corporation) or a share of the net income from a partnership or LLC. In this case, if your spouse works on a day-to-day basis in the business you may decide not to pay a salary to this person in addition to the money received as an owner.
But there are some advantages to classifying your spouse as an employee.
Social Security credit for spouses as employees
If your spouse works in your business for no pay, he or she doesn't accumulate credit towards Social Security. But hiring your spouse as an employee means that he or she will receive Social Security credits toward receiving a Social Security income at retirementt. Of course, this also means that FICA tax (Social Security/Medicare) will be withheld from your spouse's pay and that the business will also have to contribute to this account.
If your business has a retirement plan, your working spouse/employee can receive retirement benefits. The contributions to the retirement plan made by your company are tax deductible, up to 25% of compensation or $49,000, whichever is less.
Health insurance coverage for spouse/employees
If your business provides health insurance coverage to employees, you may find it cheaper to cover your spouse as an employee rather than as a dependent under your coverage as an employee/owner.
The cost of company-paid premiums for your spouse's health insurance is deductible to the company.
You may also want to look at the impact of hiring your spouse on the health care tax credit available to small businesses that pay for health insurance for employees.
Business travel with spouse/employees
If your spouse/employee has a legitimate reason to travel with you on business trips, you can deduct your spouse's travel costs as a business expense, and your spouse would not have to pay taxes on these travel benefits. Just be sure that you can justify the reason for your spouse to accompany you on a business trip as an employee, and the reason should relate to your spouse's position with the company.
"Holding your luggage" doesn't count as a legitimate reason for your spouse to go on this trip as an employee, but if your spouse is marketing manager and you are going to a trade show, this could be legitimate.
Life insurance and other benefits for spouse/employees
Your spouse/employee can receive any benefits given to other employees, including employer-provided life insurance. Premium costs up to $50,000 of group term life insurance are not taxable to employees and are deductible as a business expense.
What are the drawbacks of treating my spouse as an employee?
The principal cost of treating a spouse as an employee are:
- costs of employment taxes, including the amount of FICA tax and unemployment tax that must be paid by the employer, and
- costs of providing employee benefits to your spouse, including costs for putting a spousal employee on the company health care plan and paying for life insurance premiums.
Of course, all of these costs are deductible as business expenses by the company.
If your business is a corporation, consider the difference between your personal tax bracket and the corporate tax bracket when weighing the effect of hiring your spouse as an employee. In other words, look at the difference between the income to your spouse as an employee vs. costs to the corporation of hiring and paying.
A potential drawback may also be issues that arise in the event of a divorce. If your spouse is working in your company and you decide to divorce, check with your tax advisor and attorney about potential issues that may need to be resolved.
Treating your spouse as an employee
If you decide to put your spouse on the payroll as an employee, you must treat him or her as an employee in every way:
- Give your spouse a title and an appropriate salary for that title.
- Have our spouse complete all the required new hire forms and payroll authorizations, the same as any other new employee. Read more about the new hire forms you should have your spouse complete.
- Make all required deductions and withholding from your spouse's pay, including withholding federal income tax and making FICA deductions.
- Include your spouse/employee in all benefits coverage provided to other employees.
- You should be able to prove that your spouse is actually doing the work for which he or she is being paid.
- If your spouse is also an officer or owner of your business, keep the salaried duties separate from any ownership activities.
Special circumstance: S corporation owners.
If you and/or your spouse own more than 2% of an S corporation, some of the benefits of "spouse as an employee", may not be available to you. Read this IRS article on S corporation Compensation and Medical Insurance Issues and contact your tax advisor.
Disclaimer: This article is intended to provide general information and is not intended to be tax or legal advice. Every situation is different, and tax laws change. Before you hire your spouse as an employee, discuss your specific situation with your tax and legal advisors.