Many entrepreneurs make their business a family affair. This can make sense in a lot of cases. It might even make sense to hire your spouse as an employee. After all, what's better than working with the love of your life? Business trips, planning meetings, and other activities can be way more fun with your spouse.
Plus, there might be tax benefits.
Benefits of Hiring Your Spouse
Many entrepreneurs hire their spouses because it means a tax benefit. Here are some of the benefits that come with hiring your spouse and paying him or her a salary:
- Your spouse can accumulate Social Security credit. If you don't pay your spouse, he or she doesn't accumulate benefits. However, with the pay, it's possible to increase your overall retirement benefit as a household when your spouse is earning, too.
- It's possible to contribute to a plan for your spouse if your company offers a retirement plan. Your contribution to your spouse's employee retirement plan are deductible, up to the lesser of $49,000 or 25% of compensation.
- Other benefits: If your company offers other benefits, such as life insurance and health insurance, what you contribute to your spouse's benefits is tax deductible.
- Health insurance: Run the numbers. In some cases, it might be cheaper to cover your spouse as an employee than to add him or her as a dependent to your health care plan.
- Travel: As long as your spouse has an actual, relevant title, and does business things with you as you travel, the expenses related to that travel are tax-deductible.
It's important that you double check your company's organization, though. In some cases, you might not be able to take advantage of the same employee benefits if your spouse owns more than 2% of your S-Corp.
Also, realize that if you are going to take advantage of these benefits when for your spouse, you need to make sure you follow all the rules. Your spouse will need to fill out employee paperwork, and you will need to withhold FICA from your spouse's paycheck (and pay your share of the FICA tax). Consult with an accountant prior to make this decision.
Is It Really a Good Idea to Work with Your Spouse?
The potential tax benefit is not the only thing to consider. You will need to consider your tax bracket, and what your spouse's compensation means for your overall household income. In some cases, your spouse's income from the business can bump you into a higher bracket, and make you ineligible for other tax deductions and credits. Weigh the costs and benefits and decide whether it makes financial sense to hire your spouse.
Also, you need to consider whether it makes sense for your relationship. My husband and I make it point not to work together. Sometimes, it puts stress on the relationship to be in such close proximity all the time. In my situation, it makes more sense for us to have our own separate career/business paths. That way, when we're together, it can be about us, and not about the business. It makes a big difference.
Figure out if working for spouse will work for you emotionally, and then work out the financial and practical aspects.