Work is usually a “family affair” for small business owners. Typically, your spouse will pitch in whenever and wherever help is needed. This is particularly true in the summer months when other employees take their vacation leave.
Strategy: Hire your spouse. It should be more than an informal arrangement. Officially put your spouse on the company payroll.
If you employ a previously unemployed spouse, your company may be eligible for new tax breaks under the Hiring Incentives for Restoring Employment (HIRE) Act (see box below). And, even if the company doesn’t qualify for the HIRE breaks, there are at least six potential tax benefits for the taking.
1. Build up tax-favored funds for retirement. As long as the tax-law requirements are met, an employer can deduct the full amount of the contributions to a qualified retirement plan made on behalf of a spouse. For instance, if your company provides a defined contribution plan to employees, in 2010 it can deduct contributions up to the lesser of 25% of compensation or $49,000. The contributions accumulate tax-deferred until they are withdrawn.
2. Shift taxable income away from the company. If you’re operating a C corporation, any compensation paid to your spouse would have stayed with the company. Assuming the corporation is in a higher tax bracket than your personal tax bracket, you can save tax overall if your spouse draws a salary. On the other hand, there’s no income-shifting tax benefit—and possibly a drawback—if the company is in a lower tax bracket than you are.
Note: S corporation owners, partners and sole proprietors don’t pay corporate income tax. The income from the business is reported personally whether or not the spouse is paid a salary. So this one could be a wash.
3. Further a spouse’s education. Your company can arrange to send an owner’s spouse “back to school” on a part-time basis. Generally, education expenses incurred to improve an employee’s job skills are deductible by the company and tax-free to the employee.
4. Get more tax mileage from business trips. Generally, an employer can’t deduct travel expenses attributable to a spouse who accompanies the owner or another high-ranking employee on a business excursion. However, if your spouse is a bona fide company employee and is going for a valid business reason, his or her travel costs—including air fare, lodging and 50% of meal expenses—are deductible. The benefit is also tax-free to your spouse.
5. Cure health insurance coverage ills. If you’re currently paying more to cover a spouse under the company health insurance plan, hiring your spouse shifts the expense to the company. The company can deduct the full cost of the health insurance paid for the spouse, just as it can for other employees. And, even if you’re self-employed, you can still write off 100% of the cost.
6. Join the employer-paid life insurance group. Similar to health insurance, an owner’s spouse is entitled to the same group-term life insurance coverage as other employees in the company. Key point: The first $50,000 of employer-paid group-term coverage is tax-free to an employee. Any additional amount of coverage is taxable at relatively low levels under IRS tables.
S corp owners generally can’t deductlike group-term life insurance for any employee who owns 2% or more of the company. By extension, this rule also applies to an employee-spouse.
Tip: Set up a cafeteria plan offering a variety of fringe benefits. That way, a spouse and other employees take advantage of only those benefits they want or need.
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