Here are 5 reasons why small business owners should put their spouse on payroll?
Clearly, your spouse would be both a trustworthy and reliable employee would be perfect to work as an official employee of your business. By adding your spouse on the payroll you can gain potentially five tax benefits.
1.Build up tax favored funds for retirement
Your company can deduct contributions made to a qualified retirement plan on your spouse’s behalf. If your company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $53,000 whichever is less.
With 401K plan your spouse can defer up to $18,000 to the plan (Plus and extra $6,500 if he or she is age 50 or older). Your company can match those contributions wholly or partially up to tax law limits. Or the business may make contributions on behalf of your spouse to a pension or profit-sharing plan.
Also by adding your spouse to your payroll will increase the Social Security benefit upon retirement.
2.Paying a Spousal Salary would reduce taxable income to the corporation and also reduce corporation tax.
Assuming your company is a C Corporation, any compensation paid to your spouse would normally be left in the corporation. In other words, if your corporation is in a higher tax bracket than you and your spouse, you may save tax overall by paying your spouse a salary.
Also paying a salary to your spouse allows you to take earnings out of the C Corporation without paying a double tax. For example, if you take money out of a C corporation as a dividend, you’ll pay a tax on the original earnings by the C Corporation and then another tax on the shareholder’s return when you receive the dividend. Money you take out of a C corporation for salary is taxed only once to the employee.
S corporation or a sole proprietorship do not have to worry about corporate taxes. The income from your business is reported on your personal return, whether or not your spouse is paid a salary. In this case, there is no income tax advantage to putting your spouse on the payroll.
3.Get more tax mileage from business trips
By putting your spouse on the payroll, you may be able to claim extra travel deductions if your spouse accompanies you on a business trip or makes separate business travel arrangements.
Under current law, you may deduct your spouse’s travel expenses including air fare, lodging and 50% of the meal expenses only if he or she is a formal employee of the business.
4.Create a deductible health insurance expense
If you’re already paying more to cover your spouse under your company health insurance plan, by hiring him or her shifts the expense to your company. Once your souse is an employee of the company, your company can deduct your spouse’s full health insurance cost.
Sole proprietorships can deduct 100% of the cost under Section 105 Medical Reimbursement Plan. Section 105 allows business owner to deduct 100% of:
•Health insurance and dental insurance premiums for eligible employee(s) and family.
•Uninsured (out-of-pocket) medical, dental, and vision care expenses for eligible employee(s) and family.
•Life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).
5. Participate in the employer-paid life insurance group
Once your spouse is your employee he or she is entitled to the same group term life insurance coverage as your other employees. The first $50,000 of employer paid, group term coverage is tax free to an employee and is not included in the employee’s gross income.
For S Corp owners, group term life insurance for any employee who owns 2% or more of the company the life insurance is not deductible.
The only drawback to making your spouse an employee involves payroll taxes and workers’ compensation insurance. As with any employee, your business must pay employment taxes and workers’ comp on any wages paid to your spouse. Act (FICA) and pay Federal Unemployment Tax Act (FUTA) taxes on all wages paid – including Social Security and Medicare taxes.