One of the most overlooked tax planning strategies is to hire your spouse to help you in your business. Although many self-employed taxpayers are aware of this, I find that they don't necessarily maximize all the benefits it can provide.
First of all, let me explain that this strategy is only designed for self-employed taxpayers. You can be organized as a single member LLC and choose to be taxed as a sole proprietor, but if your business is taxed as an S corporation (either an LLC or an incorporated S corp), you will not qualify for this exemption because spouses of S corporation owners are considered 2% owners of the business, even if the corporation is owned entirely by the agent. And owners of S corporations are restricted from deducting most of the benefits outlined below. If your business is a C corporation, you will be able to provide many of the same benefits, but both you and your spouse's wages will be fully taxed for unemployment taxes and most likely, workers' compensation insurance in your state.
If you are self-employed and hire your spouse, their wages are:
• subject to income tax withholding
• subject to Social Security and Medicare taxes
• will most likely be subject to city tax withholding, depending on where you live
• not subject to Federal Unemployment Tax
• possibly not subject to State Unemployment Tax or Workers' Compensation, but check with your state to be sure
At first glance, it doesn't appear that you will save any money by employing your spouse, since your net earnings on Schedule C are essentially treated the same way. But here is where the real difference is - you can offer all of the following nontaxable employee benefits to your spouse:
• Medical Expense Reimbursement Plan (Sec. 105 Plan). You can reimburse your spouse for ALL of your family's medical expenses (see my previous blog for a complete description). Since this includes healthcare premiums, deductibles, medical bills, orthodontic expenses, and even over-the-counter medicines, it is much more beneficial than taking the self-employed health insurance deduction on Form 1040 for your medical expenses that are over 7.5% of your AGI on Schedule A. For a married taxpayer with ,000 of total medical expenses, including insurance premiums of ,000, Schedule C income of ,000 and other family income of ,000, the taxpayer would potentially save over ,000 in self-employment and federal income taxes. They would also potentially reduce both their state and local income taxes, if applicable. This requires a formal written plan and must be offered to all employees.
• Dependent Care Benefit Plan. You can pay your employee spouse up to ,000 tax-free to pay for dependent care expenses. This also requires a formal written plan and must generally be offered to all employees.
• Travel Costs for Bona Fide Business Purposes
• Group term life insurance with up to ,000 in coverage
• Qualified Retirement Plan Contributions
• Disability Insurance
• De Minimis Fringe Benefits. These can include occasional theatre or sporting ticket events, office refreshments, occasional parties or group meals for employees, birthday and holiday gifts with small value, etc. This may seem trivial, but it really does add up over the year.
It is important to keep in mind that employing your spouse will normally require you to file quarterly and yearly employment tax returns, including W-2's, but the potential benefits usually far outweigh the costs. If you pay your spouse a set salary every pay period, handling payroll tax deductions and filing your returns should be fairly simple once you get everything set up.
If you don't currently employ your spouse, you should consider hiring them now to reduce your taxes in 2010. Talk to your accountant today to be sure you comply with all the regulations in your area.
Tax Benefits of Hiring Your Spouse for Self-EmployedApply Payday Loans Online
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