Spouses are a huge support system and they can also save you big on taxes, there’s nothing like it! Having your spouse on the S corporation payroll can be advantageous for tax purposes if done correctly and strategically. Below we will cover the potential pros and cons of this approach…in matrimony!
- Determining reasonable salary
Before we jump too far in, let’s talk about how we would determine a reasonable salary if we were adding your spouse to payroll. One of the ways we determine reasonable shareholder salary is by the value of the tasks and duties being performed by the shareholder. Your spouse must receive a salary that is well-suited for their job and which is at par with what others receive who perform similar duties. Obey employer regulations set forth by your state. Despite your spouse being the only employee, depending on your state's laws, you might still need to register as an employer and offer them workers' compensation insurance. - Retirement Benefits
If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse. For instance, if your company has a 401(k) plan in place in 2024, your spouse can elect to defer up to $23,000 ($30,500 if age 50 or older) for the year, in addition to any matching contributions by the company. Typically, a company will match up to 3% of compensation that’s deferred.
Contributions compound in the account on a tax-deferred basis until withdrawals are made. This is a good way for your spouse to save for retirement independently. - Travel Expenses
In the normal course of events, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. This is a non-deductible personal expense. But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. If you travel for work, you can bring your spouse with you. Of course, you have to have legitimate reasons to bring your spouse with you. However, if your spouse travels as your chauffeur, your assistant, your scheduler, or the like, you may be able to deduct your travel expenses and your spouse’s expenses. That benefits both you and your agency.
Dinners with your spouse could be booked as a business meeting making your meals expense 50% deductible (the 100% deductibility ended in 2022). Keep in mind that what makes business meals deductible is that you were meeting to discuss business regardless, and a meal happened to be consumed at the same time. - Vehicle Expenses
It’s likely that you and your spouse currently drive your own vehicles. Although you may derive tax benefits for your vehicle’s business use, your spouse’s expenses are purely personal and non-deductible. But if your spouse is an employee, you might be able to purchase a third vehicle that is used for business purposes and create another deductible business expense. The vehicle does need to primarily be used in the business and titled in the business name to be considered a business use vehicle. - Health Insurance and Health Reimbursement Arrangement (HRA)
Besides lower health insurance premiums, you could also receive Health Reimbursement Account (HRA) benefits if your spouse is on the payroll and if you operate the practice as a sole proprietorship or a C corporation. If your practice is one of those entities, it can reimburse you and your employed spouse for all of your out-of-pocket medical expenses and health insurance premiums. Then, the practice can claim all of those reimbursements as business tax deductions, a win-win.
However, there are some basic rules you need to know about with an HRA:
- You need a health insurance plan to participate.
- The business owns the HRA.
- Only the business can put money into an HRA because the HRA is a business asset.
- The business determines how much money is contributed to the HRA and keeps any unused dollars in the account.
- You can use the money in the account to pay for your family’s medical expenses as long as they are recognized by IRS Publication 502.
- The HRA does not earn interest.
- Dependent Care Credit
To qualify for dependent care tax credits (like a childcare facility or pre-school), both parents must be working, looking for work or be full-time students, or a combination. Therefore, creating a viable job description and having your spouse receive a paycheck allows you to be eligible for dependent care tax credits.
Six Requirements For Hiring Your Spouse:
- They must have a job description and an appropriate income for that job description.
- Your spouse must complete all the new hire forms just like any other employee.
- You must make all the required payroll deductions and withholdings for your spouse.
- You must include your spouse in all the benefit programs that your company offers to employees.
- You must be able to prove that your spouse is actually doing the work.
- Finally, your spouse receives a salary and is not a partner in the business. If your spouse co-owns the business with you, that means they have entered a partnership with you and makes them a partner who is different from an employee.
Final thoughts…
As a reminder, this post is for informational purposes only and should not be taken as tax or legal advice. The goal of this article is to give you ideas that might work for you and your agency. Before you put any of these ideas into practice, there may be state-specific laws or rules that need to examined more closely. To see if this is beneficial for you, please consult with your assigned tax advisor or book a tax planning call with us if you’re already a tax client.