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Business Owner
Tax Breaks Allowed for Hiring Family Members
Hire Your Spouse to Save Tax Dollars on Health Care,
Pensions and Child Care
Here are six outstanding tax-related reasons to consider placing your
spouse on the business payroll:
Medical Insurance. If your business is operated as a sole
proprietorship, employing your spouse and providing family health
insurance coverage as a tax-free fringe benefit will allow you to fully
deduct the health insurance premiums from your business income. This will
reduce the amount of self-employment tax you pay. Generally, self-employed
taxpayers deduct 100% of medical insurance premiums as an adjustment to
income, which will have no effect on the self-employment tax you pay. With
this arrangement, sole proprietors are covered under their spouse’s family
plan and will benefit from a savings in self-employment tax.
Increased Pension Contributions. Generally, only the first $205,000
(for 2004) of salary can be taken into account when computing allowable
contributions to most qualified retirement plans. If your salary is more
than that, putting your spouse on the payroll and shifting some of your
salary in excess of $205,000 to your spouse will increase your combined
retirement contributions.
Child Care Deduction. Putting your spouse on the payroll will make
you eligible to claim a credit for expenses incurred for child care. The
size of the credit depends on two things – how much you pay for child care
and your adjusted gross income. The maximum allowable credit for two or
more children can be computed using up to $6,000 of qualified expenses. If
only one spouse earns a wage, with a few exceptions, no credit for child
care is allowed.
Business Trips. If you take business trips, you are not allowed to
deduct your spouse’s expenses if he or she accompanies you. If your spouse
is a bona fide employee with a valid business reason to accompany you on a
business trip, you can deduct your spouse's business travel
expenses.
Avoid Double Tax. If you operate your business as a C corporation,
paying a salary to your spouse allows you to take earnings out of the
corporation without paying a double tax. For example, if you take money
out of a C corporation as a dividend, you’ll pay a tax on the original
earnings by the C corporation and then another tax on the shareholder’s
return when you receive the dividend. Money you take out of a C
corporation for salary is taxed only once – to the employee.
Social Security. If your spouse isn’t currently employed, or is not
earning enough wages to reach the social security maximum, collecting a
salary from your business may increase his or her future social security
benefits.
However, a word of caution – if you employ your spouse, you have to pay
payroll taxes on the additional salary. Payment of the payroll taxes may
offset some of the benefits gained by putting your spouse on the payroll.
Also, your spouse must be a bona fide employee who performs legitimate
work for the business and collects a reasonable wage for the services
performed.
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