Does your business need trustworthy and reliable employees? You may not have to look any further than across the dinner table.
Strategy: Hire your spouse to work for your company as an official employee. Why put your spouse on the payroll? Because you can gain six tax benefits:
1. Build up tax-favored funds for retirement
If you meet the tax-law requirements, your company can deduct contributions made to a qualified retirement plan on your spouse’s behalf. The annual limits are quite generous. For instance, if your company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $45,000, whichever is less, for 2007. The contributions accumulate tax deferred until withdrawn.
With a 401(k) plan, another dollar limit applies: Your spouse can defer up to $15,500 to the plan in 2007 (plus an extra $5,000 if he or she is age 50 or older). Your company can match those contributions wholly or partially up to tax-law limits.
2. Shift taxable income away from the company
If you operate a C corporation, any compensation you pay to your spouse would have to stay with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you’ll save tax overall if your spouse draws a salary. On the other hand, don’t look for any income-shifting tax benefit—possibly a drawback— if your company falls in a lower tax bracket than your personal bracket.
Note: S corporation owners and sole proprietors don’t pay corporate income tax. You report business income on your personal return whether or not you pay your spouse a salary. So this could be a wash.
3. Go to the head of the tax class
Your company can arrange to send your spouse “back to school” on either a part-time or a full-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, you can’t deduct the travel expenses attributable to your spouse if he or she accompanies you on a business excursion. However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging and 50% of the meal expenses. The benefit also is tax-free to your spouse.
5. Cure health insurance coverage ills
If you’re already paying more to cover your spouse under your company health insurance plan, hiring him or her shifts the expense to your company. Typically, your company can deduct your spouse’s full health insurance cost, just as it can for other employees. Even self-employeds can write off 100% of the cost under a so-called Section 105 medical-reimbursement plan.
6. Join the employer-paid life insurance group
Your spouse is entitled to the same group-term life insurance coverage as your other employees.
Key point: The first $50,000 of employer-paid, group-term coverage is tax-free to an employee. The IRS taxes any additional coverage at relatively low levels under IRS tables.
However, one catch for S corp owners: Generally, you can’t deduct , such as group-term life insurance, for any employee who owns 2% or more of the company. By extension, that rule also applies to an employee-spouse.
Tip: Set up a cafeteria plan offering a variety of fringe benefits. That way, your spouse and your other employees take only those benefits they want or need.
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