Is your business having a hard time finding people to work the weeks around July 4th or Labor Day when many employees take vacation? You may ask your spouse to help pitch in if he or she is familiar with the operation. But this doesn't have to be a stopgap measure. There are several key advantages to making a spouse a full-time employee.
Here are eight potential benefits to officially adding your spouse to the payroll.
1. Retirement savings accounts. In 2022, employees can defer up to $20,500 ($27,000 if age 50 or older) to a 401(k) plan. Contributions are made on a pretax basis and compound without tax until withdrawn — usually in retirement when the participant may be in a lower tax bracket. Employees may be eligible for "matching contributions" by your company, based on a percentage of compensation. Matching contributions are also exempt from tax and deductible by the employer.
What's more, an employee may benefit from other types of qualified retirement plans, such as traditional pension and profit-sharing plans. And, because your spouse has earned income, he or she may be eligible to set up an IRA.
2. Health insurance. If you're currently paying to cover your spouse under your health insurance plan you may be able to shift more of the cost to your company. Your business can deduct health insurance premiums it pays on behalf of your spouse (just as it can for other employees).
3. Health reimbursement arrangements (HRAs). You might take the tax breaks for health insurance one step further with an HRA if 1) you operate a C corporation, or 2) you're self-employed. As long as certain requirements are met, the business may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums. The icing on the cake? Reimbursements are deductible by your company.
4. Educational assistance plans (EAPs). Spouses who become employees may want to sharpen their business skills, especially if they've been out of the workforce recently. Your company can send your spouse "back to school" part-time through a tax-favored EAP. In general, qualified education expenses of up to $5,250 a year paid or reimbursed through an EAP are deductible by your business and tax-free to the employee-spouse. But the plan can't discriminate in favor of the company's top earners.
5. Dependent care assistance plans. If your spouse working full-time means your family now must incur child-care expenses, a written dependent care assistance plan can help. Your business may provide up to $5,000 in annual benefits exempt from tax. However, benefit payments made to 5%-or-more owners (including their spouses) can't exceed 25% of the amount being paid by the employer for all employees.
6. Business travel. Normally, you can't deduct travel expenses for a spouse who tags along on a business trip. This is a nondeductible personal expense. But the tax outcome is different if your spouse is a bona fide employee and is travelling for valid business reasons. In that case, your company can deduct your spouse's business-related travel expenses. Typically, expenses such as airfare or other transportation, lodging, and 50% of the cost of meals (100% for restaurant-provided meals in 2021 and 2022) are deductible and the benefit is tax-free to your spouse. The same basic rules apply if your spouse travels on business alone.
7. Group-term life insurance. Your spouse is entitled to the same group-term life insurance coverage as other company employees — for example, an amount equal to three or four times the salary. Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Any additional coverage is taxable at relatively low rates. Thus, your family can gain more insurance protection at an affordable (or no) cost.
8. Vehicles. When not employed by your business, your spouse's car expenses are strictly personal and nondeductible. But if your spouse is employed by your company, you may be entitled to business deductions under a complex set of rules, including limits on so-called "luxury cars." Check with your tax professional.
Note that hiring a spouse will be particularly advantageous if your business entity is a C Corporation or you're self-employed. On the other hand, S corporation owners generally can't deduct certain fringe benefits such as group-term life insurance for any employee owning 2% or more of the company. This rule extends to coverage for an employee-spouse.
Finally, there are other tax repercussions to consider when hiring a spouse, including income and payroll taxes your spouse will owe on wages for services rendered. Nevertheless, this is often a relatively small price to pay for the many tax-favored rewards. Weigh all the relevant factors for your situation and consult with a professional advisor.
Get in touch today and find out how we can help you meet your objectives.
