While I won’t argue the pros and cons of choosing to spend every waking moment with your spouse, there are a few perks from a tax perspective. To be clear, I don’t advocate hiring your spouse or children in name only. If you are going to hire a loved one, whether it be a spouse or child, he or she needs to be a bona fide employee, otherwise the IRS can reverse any of the benefits you receive. If you are a business owner and your spouse is willing and able to work for your company, there are a few benefits that may help seal the deal.
As long as your spouse or child is a legitimate employee, you can take deductions for his or her meals and travel. It’s a common misconception that if you are a sole proprietor and your spouse runs errands for your company that you can deduct his or her travel expenses. If your spouse is not an employee or owner, you cannot. For example, if you travel to a conference, you can deduct your airfare, but not your spouse’s, the full cost of the hotel and your portion of the meals. So, by hiring your spouse or by making him or her an owner of the business, you can now fully deduct both yours and your spouse’s portion of the trip and take a larger deduction for a trip you would’ve taken anyway.
The same deduction rules apply to your spouse’s mileage. Quite often, I see small businesses for which the spouse is the primary errand runner, but he or she cannot legitimately deduct those miles. Adding your spouse to the payroll can greatly increase your deductions, often for expenses you were incurring anyway. Meals and entertainment also fit into this category. Any time you have a business meal with your employees (also known as your spouse or kids), you can now deduct the cost as long as you discuss business during the meal.
Medical insurance benefits are another good reason to hire a family member. If your company pays 100 percent of its employees’ health benefits, but only 50 percent of employees’ family benefits, then the owner is subject to the same rules. But, if your spouse becomes a bona fide employee, then the business can pay 100 percent of his or her health insurance premiums. Needless to say, as insurance costs continue to rise, the tax savings from this benefit could be substantial.
Life insurance is another potential deduction, though it’s a bit more complicated. Employers can deduct the premiums for the first $50,000 of employer-paid, group-term coverage, and that benefit is tax free to the employee. But the caveat is that the business cannot deduct this expense for any employee who owns 2 percent or more of the company. So, while it might not work for the primary owner, if you add a family member as an employee and don’t give them ownership, he or she would be eligible for this deduction.
Like most tax deductions, you need to weigh out the costs of adding the benefit versus the true tax deduction. But if you sit down with your accountant and go through these potential benefits, there should be a clear answer as to whether it will benefit you to make your spouse a part of the business.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.