Good news: Business is booming and you’re as busy as ever. However, you may suddenly find yourself short-staffed in the office. In the past, you may have asked your kids to pitch in, but now they’re back at school or out on their own. Fortunately, your spouse has some free time and knows the operation inside-out.
Strategy: Hire your spouse to help out. In fact, you should make your spouse an official company “employee,” with all that entails, including filing all the proper paperwork with the IRS.
Of course, your spouse will owe income and payroll taxes on wages, just like any other new hire, but he or she is also in line for the usual. Here are five ways to sweeten the pot.
1. Build a retirement nest egg. As long as certain requirements are met, an employer can deduct the full amount of contributions made to a qualified retirement on behalf of an employee-spouse. For instance, if your company has a profit-sharing plan, in 2013 it can contribute the lesser of 25% of compensation or $51,000. With a 401(k), your spouse can elect to defer up to $17,500 ($23,000 if age 50 or older), and the company can also make contributions (subject to tax-law limits) that are tax-free to your spouse. Contributions grow within the account on a tax-deferred basis.
2. Get more mileage from business trips. Generally, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business excursion. However, if your spouse is a bona fide employee of the company and is going along for a valid business reason, the travel costs—including air fare, lodging and 50% of the cost of meals—are deductible. The benefit is also tax-free to your spouse.
3. Cure health insurance ills. If you’re currently paying more to cover your spouse under the company’s 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 your spouse, just as it can for other employees. And, even if you’re self-employed, you can still write off 100% of the cost.
4. Advance your spouse’s education. If your spouse wants to sharpen his or her business skills, your company can arrange to send him “back to school” part time. Generally, expenses paid out under an educational assistance plan are deductible by the company and tax-free to the employee, up to $5,250 a year.
5. Be part of the 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 (e.g., equal to three or four times salary). Key point: The first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Also, any additional coverage is taxed at relatively low rates.
These perks are particularly advantageous when the business entity is a C corporation. Note that S corporation owners generally can’t deductlike group-term life insurance for any employee owning 2% or more of the company. By extension, this rule also applies to coverage for a shareholder’s employee-spouse.
Tip: Set up a cafeteria plan offering a variety of fringe benefits. In this way, your spouse and employees only take advantage of those benefits they choose.
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