Does your business need trustworthy and reliable employees? You may not have to look any farther than across the dinner table.
Strategy: Hire your spouse to work as an official employee. Why put your spouse on the payroll? Because you can gain five tax benefits:
- 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 souse’s behalf. The annual limits are quite generous. If you company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $54,000, whichever is less.
With a 401(k) plan, another dollar limit applies; Your spouse can defer up to $18,000 to the plan in 2017 (plus and extra $6,000 if he or she is 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. But 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 on your personal return whether or not you pay your spouse a salary. So this could be a wash.
3. Get more tax mileage from business trips
Generally, you can’t deduct the travel expenses attributed 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.
4. Cure health insurance 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 costs.
Even self-employes can write off 100% of the cost under a so-called Section 105 medical reimbursement plan.
5. Join the employer-paid life insurance group
You’re 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.
However, one catch for S Corp owners: Generally, you can’t deduct fringe benefits, such as group-tern life insurance, for any employee who owns 2% or more of the company. By extension, that rule also applies to an employee-spouse.
At Bourke Accounting we are here to answer any questions you have on the ever changing tax laws. Give our office a call today to discuss your tax questions 502-451-8773.