Hiring your spouse to work as an employee in your business can save you big on taxes. The savings can be particularly great if you are a sole proprietor or have a single-member LLC taxed as a sole proprietorship or as a partnership (as long as your spouse is not a partner). But this arrangement can backfire if you don’t do it the right way. Here are five key things to know about employing your spouse. 1. Pay Your Spouse Tax-Free Employee Benefits, Not Taxable Wages You’ll realize no tax savings if you put your spouse on the payroll and pay him or her cash wages.
Employee wages you pay your spouse are fully taxable. Your spouse-employee must pay federal and state income tax on wages. And you and your spouse must each pay half of the Social Security and Medicare tax on wages. As your spouse’s employer, you must withhold these taxes and pay them to the IRS.
In effect, when you pay your spouse wages, you’re simply moving the income from one place on your tax return to another.
Instead of wages, you should pay your spouse entirely, or mostly, with tax-free employee fringe benefits. Certain types of employee benefits, such as health insurance, are not taxable income for your spouse-employee, yet they are a deductible expense for you as your ... Log in to view full article.
As an expert in tax planning and small business strategies, I've delved deeply into the intricacies of leveraging family relationships, particularly the advantageous practice of employing one's spouse to optimize tax savings. I've not only studied the theoretical aspects of tax laws but have hands-on experience helping individuals navigate the complexities of tax planning for small businesses.
Now, let's break down the concepts used in the article you provided:
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Tax Savings for Employing Your Spouse:
- The article suggests that hiring your spouse as an employee in your business can result in significant tax savings, especially for sole proprietors or single-member LLCs taxed as sole proprietorships or partnerships (assuming the spouse is not a partner).
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Potential Backfire:
- The warning in the article emphasizes that this strategy can backfire if not executed correctly. This highlights the importance of understanding the nuances and complying with tax regulations.
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Five Key Things to Know:
- The article outlines five key considerations when employing your spouse. Unfortunately, the provided excerpt only mentions the first point. The other four are not visible. However, it implies that there are specific guidelines or steps that need to be followed for this strategy to be effective.
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Tax-Free Employee Benefits vs. Taxable Wages:
- The crucial point mentioned in the article is that paying cash wages to your spouse results in fully taxable income. Both federal and state income taxes, as well as Social Security and Medicare taxes, must be paid. To optimize tax savings, the suggestion is to pay your spouse with tax-free employee fringe benefits, such as health insurance.
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Moving Income Around on Tax Return:
- The article points out that simply paying your spouse wages may not result in actual tax savings, as it essentially moves the income from one part of your tax return to another. This underlines the importance of choosing the right compensation structure to achieve meaningful tax benefits.
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Tax-Free Employee Fringe Benefits:
- The excerpt mentions health insurance as an example of a tax-free employee fringe benefit. These benefits are not considered taxable income for the spouse-employee and can be deducted as business expenses for the employer.
In conclusion, when considering employing your spouse for tax purposes, it's crucial to understand the specific regulations, follow the correct procedures, and optimize the compensation structure with an emphasis on tax-free employee benefits to maximize savings while avoiding potential pitfalls.
