There can be tax benefits to hiring your spouse as an employee with your business, but how you do this is important as the process can get quite convoluted and specific.
Read on to see what you should be analyzing and how you can employ your spouse properly while also receiving some tax benefits along the way.
Prove that your spouse is an actual employee
Spouse-employees can become an easy target for the IRS, so it’s important that you can prove your spouse is indeed a full-blown employee with your company. This can be proven in a variety of ways.
Make sure your spouse is:
– Not included on the title of your business or as an owner in any capacity.
– Actually being paid by submitting their claim for reimbursement expenses every month.
– Being paid fairly for real work that they are doing for the company.
– Reporting to you and not above you in terms of making any big business or financial decisions.
Update your payment process
Instead of paying your spouse with cash wages that are taxable amounts, you should be paying them with employee fringe benefits. When paying them with fringe benefits, this means you also won’t have to pay payroll taxes, file employment tax returns, or a W-2 for your spouse.
You might be asking yourself, what is a fringe benefit? The IRS defines these benefits as “a form of payment for the performance of services.” This means the employer is still the provider of the benefit even if a third-party company is providing your employee with the actual benefits.
Health insurance is a common employee benefit that doesn’t count as taxable income for your employee, therefore you’ll experience some tax savings there.
The only tax requirements needed to deduct employee fringe benefits is to make sure your spouse is fully an employee of your company and that the pay they receive is reasonable.
Do your research and don’t forget to take advantage of other fringe benefits like life insurance, education, and more.
Create a medical reimbursement plan
When your spouse is the only other employee of your business, you’re able to come up with your own spousal health reimbursement arrangement. This is also referred to as a 105-HRA by the IRS. With this in place, you’re not subject to any Affordable Care Act (ACA) restrictions and you’re able to deduct the full amount as an ordinary business expense for an employee benefit program.
A 105-HRA will only work how you want it to if you have no other employees than your spouse. If you do want to cover all of your employees and your spouse, you can set up an Individual Coverage Health Reimbursement Account.
This account holds a monthly allowance of money that the employer sets, for employees to use on health expenses. This money is tax-free and there are no caps on the monthly allowance set.
Before you say yes to hiring your spouse as an employee at your company, make sure you do the research and have the proper documentation and arrangements in place. Don’t be afraid to consult with a tax professional with any questions you might have along the way.
We’re here to help you through the business tax preparation process! Let us know if you have any questions and feel free to contact us at 410-224-2600.