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Old 06-25-2008, 04:11 PM
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Seven Tax Advantages to Hiring Your Spouse in Your Business!

Seven Tax Advantages to Hiring Your Spouse
There are 7 tax advantages to hiring your spouse and putting him or her on the business payroll, apart from some of the obvious non-tax related reasons for hiring your spouse. These are listed below as follows;

1.To Qualify for Social Security Benefits
This is pretty obvious in that if your spouse is employed, clearly collecting a salary from your business will increase the spouse’s future social security benefits. This is especially important if the spouse has not earned the necessary credits required to qualify for a future social security benefits.

2.To Avoid Double Taxation
If a taxpayer conducts a business pretty through a Regular ‘C’ corporation, then paying salaries or wages to a spouse will enable the corporation to receive a tax deduction. This tax deduction will reduce taxable income subject to the corporation tax liability, and thus avoiding what is generally referred to double taxation. Had the spouse not taken a payroll, the net income of the corporation would be higher, and would be subject to corporation tax. The residual profits, or retained earnings (that is profit left over after being taxed), can be withdrawn through issuing a dividend to the shareholders.

But, the dividends when distributed to the shareholder are also subject to income tax when received by the shareholder. Hence, these dividends are sometimes referred to as being double taxed, once at the corporate level, and then again at the shareholder level. But, these double taxes can generally be avoided if monies are withdrawn from a C Corporation in the form of Wages or Salary as it subject to tax only once at the individual level.

3.To Qualify for Deductions related to Business Trip’s
If your spouse is a “bona fide employee”, any business trips you make with your spouse will be deductible. Making your spouse an employee is essential but it is also important to assign your spouse a vital management role so as to generally allow you to deduct all the business trips you make with your spouse.

4.To Qualify for Deductions of Medical Insurance for a Sole Proprietorship
This benefit is applicable to a business that is operated through a sole proprietorship. According to the current tax law, self-employed individuals can deduct 100% of health insurance premiums paid for themselves, a spouse and dependents. However, this deduction is allowed only as an adjustment to income on the 1040 and so there is no offset to the self-employment taxes as the deduction does not go on Schedule C, and would not reduce the amount of self-employment tax liability.

But, if the taxpayer employees a spouse on the payroll, this will allow a 100% deduction for self employed health insurance premiums on Schedule C, thus reducing the net income of business subject to the dreaded self-employment taxes that are currently subject to the 15.3% tax rate.

5.To Qualify for Increased Pension Deductions
Per IRS, “effective January 1, 2008, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $180,000 to $185,000.” Furthermore, the IRS has also stated “the limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $45,000 to $46,000.”

If the taxpayer’s salary has reached the maximum amount allowable to qualify for a retirement contribution plan, that is the salary has reached in excess of $185,000, than it would make sense to employ a spouse on the payroll and shifting some of income that is in excess of $185,000 to the spouse. In this manner, for the tax year 2008, both the spouses can then make an increased combined retirement contributions.

6.To Qualify for the Childcare Credit
According to the current tax, in order to be eligible to claim the Childcare Credit, both spouses would need to be earning. Thus, putting your spouse on the payroll will clearly enable you to become eligible to claim a credit for the childcare expenses subject to various limits established by the IRS. The credit depends on the amount spent for the childcare and the taxpayers jointly filed Adjusted Gross Income.

7.To Qualify for Educational Expenses
If a taxpayers business maintains a Section 127 educational assistance plan, then it could make financial sense in employing a spouse who then may be entitled to a to reimbursements for college education expenses.

But, the IRS tax code states that these reimbursements may not exceed 5 percent of the plan's total payouts for the year.

A Word of Caution:
It is important to note that adding your spouse on the payroll will incur a payroll tax liability that would offset some of the above benefits. So, one needs to take all the factors into consideration that provide the tax advantages discussed above and compare them to the potential additional tax liability associated with putting a spouse on the payroll prior to making a decision of employing your spouse in business.

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Old 06-25-2008, 06:09 PM
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Great Stuff TaxGuru,

Are you saying that my spouse has to be appointed a management position in order to be able to deduct the travel expenses?

What happens if I have taken the deductions and my spouse was not acting in a management position? If I get audited by the IRS will I get penalized?

Thanks!



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Old 06-25-2008, 06:18 PM
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I put my spouse on the payroll and all the advantages you mentioned provided more benefits than the cost of the payroll taxes.

So, in my case, it proved to be very beneficial to employ my spouse, of course I put her in a management position in charge of managing the money! LOL!



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Old 06-26-2008, 09:29 AM
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In case of an IRS audit, it would be generally advantageous to have your spouse be employed in some management position that would enable you to justify claiming business travel expenses.

If your spouse is involved in any management position, you should try and maintain some documentation of any management functions or decisions the spouse has made. In this manner, generally speaking, the IRS will not question any business travel expenses that are jointly claimed by both spouses.

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