Bringing my husband, James, into my business as a partner has been a win-win for us. We mostly enjoy working together and we can celebrate our business’ success together, which makes it all the more fun!
If you’re considering a business partnership with your spouse, today I’ll explain how it can help you save on taxes and build a stronger financial future. I’ll also cover some potential challenges to keep in mind.
How can hiring my spouse save us money?
Not only can working with your spouse make you feel like more of a team than ever before, there are several areas where hiring your spouse can help you save tax money!
If done correctly, you can potentially save money by maximizing your deductions and savings in all of these areas:
- Business Expenses
- Qualified Business Income (QBI) Deduction
- Social Security Tax
- Health Insurance
- Retirement
Business Expenses
Tax deductions are one of my favorite things to talk about (I’m a hoot at parties, trust me!), so let’s start by thinking about the business expenses that can be deducted once your spouse becomes your business partner or employee. The two biggies are meals and travel.
First, if you and your spouse discuss business over dinner or coffee, you can deduct 50% of that expense as a business meal. Just remember that for the IRS, the primary purpose of these meals must be business-related. You should be ready to provide documentation to support this, if necessary.
Then, in terms of travel, if both you and your spouse need to travel for business purposes, you can generally deduct the full cost of lodging, meals, and transportation on your business trips. Again, the reason for the travel needs to be business-focused, so think San Francisco conference rather than Caribbean cruise.
Qualified Business Income (QBI) Deduction
While we’re on the topic of deductions, adding your spouse to your payroll can also help you maximize your QBI deduction. If your business is structured as a pass-through entity like an S-Corporation or sole proprietorship, and both you and your spouse are receiving W-2 wages, then this pass-through tax deduction allows you to deduct up to 20% of your qualified business income.
This QBI deduction can add up to big tax savings for you and your spouse, especially if you’re in certain industries, so make sure you talk to your accountant to tally up your potential savings.
By the way, I have a magic QBI formula you can use to help determine how much to pay (reasonable compensation) to both you and your spouse in order to maximize this deduction.
Social Security
When it comes to Social Security, adding your spouse to your payroll can help in both reducing the tax you pay and increasing the benefits you’ll receive. First off, once your spouse starts getting paid from your business, this increases their Social Security and Medicare eligibility. If they’ve had limited income in the past, this will help provide them with a better opportunity to qualify for Social Security benefits independently.
You can also create tax savings in this area by redistributing your wages between the two of you. For instance, if you or your spouse earns more than the Social Security wage limit for the year, which is $168,600 in 2024, you would get a refund of any Social Security tax you paid on the earnings you had over that limit. But this is only true for the employee contributions; the employer doesn’t get that money back.
By splitting the same amount of income between the two of you, you can lower the amount of Social Security tax the business pays. This is especially helpful if your spouse already has wages from another job that will definitely take their salary over the Social Security wage cap.
If you think you’re in a situation where these Social Security savings could apply, work with an accountant to decide the right amount of wages for each of you so you can maximize this strategy.
Health Insurance
If your spouse is currently on your health insurance plan as a dependent, it may be more tax-efficient to cover them as an employee instead. This is because when you employ your spouse, your business can pay a portion or all of their health insurance premiums, which turns this expense into a business tax deduction. This means you’re reducing taxable income while still providing necessary health benefits for your family.
If you’ve set up your business so that your spouse is a shareholder who owns more than 2% of the business, the premiums they pay are fully deductible as an income adjustment and not just a limited deduction (if you itemize deductions), which can mean even more tax savings.
Additionally, in some states, like Texas, that require your business to have at least two people on the company’s payroll to meet health insurance compliance rules, adding your spouse to the payroll is one way to meet that requirement.
Retirement
Including your spouse in your business’ retirement plan can be another powerful way to save for your shared future while also reducing your business’ taxable income.
Once your spouse is an employee of your business, then the employer (you) can make tax-deductible contributions to your spouse’s retirement plan. Those contributions are tax-deductible on up to 25% of your spouse’s salary or up to the contribution limit set for the year ($69,000 in 2024), whichever is less.
Something else to keep in mind is that there are additional catch-up contributions allowed for most retirement plan types for those age 50 and over. Also, if you or your spouse are employed by another company and participating in that company’s retirement plan as well, then contribution limits for certain plan types will apply to the person and not each individual plan.
If you need help thinking through the retirement plan options for small business owners or deciding on a smart retirement strategy, consult an accountant or financial planner who can help you decide the best way to maximize your tax savings now and retirement savings in the future.
Can I still save on taxes if I don’t want my spouse to actually work for my business?
Sometimes clients want to know how much work their spouse actually needs to do for their business in order to be considered an employee or partner in the business. If your spouse doesn’t want to be involved in day-to-day operations, another option you have is to make them a limited partner (LP), which can sometimes be referred to as an investor or silent partner.
If you go this route, your spouse would not be able to make decisions for the business and would not be able to work more than 500 hours for the business each year. In terms of tax savings, you and your spouse’s income could still qualify for the QBI deduction discussed earlier, and self-employment tax (Social Security and Medicare) wouldn’t apply to your spouse’s income.
Are there other benefits to hiring my spouse to work for my business?
In addition to all of the quality time you’ll be spending together, there are several more benefits to consider when hiring your spouse:
- When you have a partnership, the IRS sees this as a more structured and formal business than a sole proprietorship or single-member company. This can lower your risk of being audited.
- If your spouse isn’t currently employed, adding them to your payroll can help you qualify for dependent care (childcare) tax credits.
-
In addition to retirement and health insurance, any tax-deductible fringe benefits your business offers can be made available to your spouse. Fringe benefits that could be made available to your spouse and lower your business’ tax bill include:
- Life insurance
- Educational Assistance Plan (EAP)
- Personal use of business assets like a cell phone
- De minimis fringe benefits like occasional snacks, small gifts, or event tickets
Why shouldn’t I hire my spouse to work for my business?
As we’ve discussed, there are tons of advantages to hiring your spouse, but there can be some challenges and drawbacks to doing this as well. In addition to the emotional strain it can take to work with your spouse, you’ll also want to consider other costs and taxes associated with payroll.
Keep in mind that if your spouse is your only employee and your business is a partnership, then you don’t have to run payroll or determine reasonable compensation. However, if you have a different business structure or other employees, setting a reasonable compensation that allows you to reap the benefits of hiring your spouse while also complying with IRS rules can be tricky.
Additionally, dividing the salary that only you were previously getting between both you and your spouse could actually increase the amount you pay for Social Security tax, unemployment tax (usually paid at both federal and state level), and disability insurance (paid to some states), so getting those wage and compensation amounts right is important.
Before you hire your spouse, it’s a smart idea to talk with an accountant who works with entrepreneurs like you. This way, you can crunch all of the numbers and not miss out on any of the tax benefits you should reap when you decide to go all in on life, love, and business together.
