Many businesses are having trouble recruiting and retaining qualified workers. According to a recent report conducted by the Society for Human Resource Management (SHRM), nearly 90% of employers reported difficulty filling open positions; 73% have seen a decrease in applications for hard-to-fill positions, and only 6% expect labor shortages to diminish any time soon.
If your small business is understaffed with no strong prospects in sight, have you considered hiring your spouse?
If he or she is already familiar with the job, hiring your spouse as an official employee can have many benefits — including various tax-savings opportunities. Here are six ways hiring a spouse may help chip in to lower your taxes.
1. Retirement savings. 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 example, if your company has a 401(k) plan in place, your spouse can elect to defer up to $20,500 ($27,000 if age 50 or older) for the year, in addition to any matching contributions by the company. This is a great way for your spouse to save for retirement independently.
2. Business travel expenses. Normally, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. It’s considered a nondeductible 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. As a result, your company may be able to write off your spouse’s business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals. Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone.
3. Health insurance premiums. If you’re currently paying to cover your spouse under the company’s health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee.
The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business.
4. Additional health-related breaks. If you operate a C corporation or you’re self-employed, a Health Reimbursement Arrangement (HRA) for your employees can offer even more tax savings if your spouse participates. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation.
Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse’s HSA. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA).
5. Vehicles. Although you may derive tax benefits for your vehicle’s business use, your spouse’s expenses are purely personal and nondeductible. But as an employee, he or she may be entitled to business deductions under a complex set of rules, including limits on so-called “luxury car” write-offs.
6. Group-term life insurance. An owner’s spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual’s salary).
Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family.
A match made in heaven?
Before you hire your spouse, meet with a professional tax advisor to discuss whether this strategy would be beneficial for your business and your tax circumstances. The CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.
The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your business or tax situation.
