Suppose your small business will be short-staffed this summer. You may decide to hire someone from the outside who may or may not work out. Alternatively, however, you might look instead at the person already familiar with your operation sitting right across from you at the kitchen table. In other words, you can hire your spouse.
Frequently, the spouse of a small business owner pitches in when needed, but without any pay. When you officially add your spouse to the company payroll, they are taxed on the compensation, but are also eligible for benefits just like any other employee. Plus, a Corporation is generally in line for deductions. Here are five prime examples.
1. Qualified retirement plans: If certain requirements are met, an employer can deduct the full amount of contributions made to a qualified retirement plan on behalf of an employee-spouse. For instance, if your company has a 401(k), your spouse can defer up to $22,500 to their account in 2023, or $30,000 if age 50 or over, in addition to any matching contributions by the company. Contributions compound within the account without any current tax erosion.
2. Health insurance: If you’re currently paying more to cover your spouse under the company’s health insurance plan, hiring your spouse shifts some of the cost to the company. The company can deduct the full premiums of the health insurance paid for your spouse as well as other employees. Note that a self-employed individual can also write off 100% of the cost above-the-line.
3. Life insurance: Comparable to health insurance, a business owner’s spouse is entitled to the same group-term life insurance coverage as other employees (e.g., equal to a three or four times salary). Notably, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Furthermore, the tax owed on any additional coverage is relatively low.
4. Business travel: Generally, you can’t deduct travel expenses attributable to a spouse when they accompany you on a business trip. However, if your spouse is a bona fide employee of the company and is coming along for legitimate business purposes, travel expenses incurred in 2023—including airfare, lodging and 50% of the meal costs—are deductible. The benefit is tax-free to your spouse.
5. Education expenses: Does your spouse want to hone their business skills in this new role? Your company can provide coverage for educational courses. Generally, expenses of up to $5,250 paid out under an educational assistance plan (EAP) are deductible by the company and tax-free to the spouse. Of course, the EAP can’t be discriminatory.
This setup is advantageous for a C Corporation. Conversely, S corporation owners generally can’t deduct fringe benefits like group-term life insurance for any employee owning 2% or more of the company. This rule also applies to coverage for an employee-spouse.
A way out? One overall option is to set up a cafeteria plan offering various fringe benefits. As a result, your spouse and employees only take advantage of those benefits they choose. Consider this as part of your company’s fringe benefit package.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
Tags: Benefits, Income Tax, IRS, Taxes
