Hiring Your Spouse? Here are Ways to to Maximize Tax Savings
By Tiffany McBroom and Melanie Sikma
Did you know that hiring your spouse as an employee in your business can lead to significant tax savings? However, if not done correctly, this arrangement can backfire.
Here are five key things to keep in mind to ensure compliance and maximize your benefits:
- Pay Tax-Free Employee Benefits, Not Taxable Wages
Instead of paying your spouse a traditional salary (which is subject to payroll taxes), consider providing tax-free employee benefits. Certain benefits, such as health insurance, are not taxable income to your spouse-employee but are fully deductible as a business expense for you as the employer. The key requirements:
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- Your spouse must be a bona fide employee (not a co-owner).
- The total compensation, including benefits, must be reasonable.
- Set Up a Medical Reimbursement Arrangement
By hiring your spouse and adopting the right type of medical reimbursement plan, you can convert health insurance premiums and other medical expenses for your spouse, yourself, and children under 27 into fully deductible business expenses. This strategy allows you to reduce your taxable income while covering essential healthcare costs.
- Take Advantage of Additional Fringe Benefits
Beyond health benefits, your spouse-employee can receive other tax-free perks, including:
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- Job-related education expenses (such as tuition for work-related courses).
- Life insurance (up to $50,000 in coverage).
- Working condition fringe benefits (such as a smartphone, laptop, or office equipment required for their job).
- De minimis benefits, such as occasional meals, snacks, gifts, and event tickets (like theater or sports events).
- Be Aware of Certain Restrictions on Tax-Free Benefits
Some benefits come with limitations:
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- Section 127 education plans prohibit tax-free educational benefits for spouses if you own more than 5% of the business.
- Transportation benefits (like parking and transit passes) can be tax-free for your spouse only if you both work in an outside office. However, these benefits are not deductible for you as the employer.
- Ensure Your Spouse is a Bona Fide Employee
To legally qualify for these tax advantages, your spouse must be an actual employee, not just a co-owner. You must be able to prove:
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- Your spouse does real work that benefits the business.
- They are paid for their work (via wages or benefits).
- They work under your direction and control as an employee.
- Their compensation (including benefits) is reasonable for the work performed.
By following these guidelines, you can legally reduce taxes while making the most of your business structure. If you have questions about setting this up correctly, please reach out to us at the info below.
** one more thing; This is a friendly reminder that the extended tax filing deadline for the 2024 tax year is coming up on October 15, 2025. **
Tiffany McBroom and Melanie Sikma are a sister powerpack combo! They grew up listening to Byron, who is their father, mentor and guide, talk tax and financial strategies with his business owning friends on camping trips. Byron has been a CPA for 30+ years and thrives on finding new solutions to saving business owners more on taxes. His excitement for helping entrepreneurs make their dreams come true led both of them into the same field as him. Learn more by visiting onestoptaxstrategists.com.
