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In the realm of small business ownership, strategic financial planning is crucial for maximizing profitability and minimizing tax liabilities. One often-overlooked strategy is hiring a spouse as an employee in the business. This approach, when executed properly, can yield significant tax advantages, strengthen retirement savings, and provide operational flexibility. By leveraging tax deductions, shifting income, and utilizing fringe benefits, hiring a spouse can be a powerful tool for small business owners, particularly those operating as sole proprietorships or partnerships.

Ability to Deduct Wages

One of the primary tax advantages of hiring a spouse is the ability to deduct their wages as a business expense. For a small business structured as a sole proprietorship or partnership (where one spouse is the owner), paying a reasonable salary to the non-owner spouse for legitimate work performed in the business is fully deductible. This reduces the business’s taxable income, effectively shifting income from the owner’s higher tax bracket to the spouse’s potentially lower tax bracket. For example, if the business owner is in the 32% tax bracket and the spouse is in the 12% bracket, paying the spouse a salary of $50,000 could save the couple $10,000 in federal income taxes (the difference between 32% and 12% on $50,000). The key is that the spouse must perform genuine work—such as bookkeeping, marketing, or administrative tasks—and the salary must be reasonable for the services provided. The Internal Revenue Service (IRS) scrutinizes such arrangements to prevent abuse, so proper documentation, including job descriptions and time records, is essential.

Boost Retirement Savings

Another significant benefit is the opportunity to contribute to retirement plans for the spouse. By hiring a spouse and paying them a salary, the business can contribute to a tax-advantaged retirement plan, such as a Simplified Employee Pension (SEP) IRA or a solo 401(k), on their behalf. For instance, in 2025, a SEP IRA allows contributions of up to 25% of the spouse’s compensation, with a maximum contribution limit of $69,000 (subject to annual IRS adjustments). These contributions are tax-deductible for the business, reducing taxable income, and the funds grow tax-deferred until withdrawal. This not only bolsters the couple’s retirement savings but also provides a tax-efficient way to reinvest business profits. Additionally, if the business sets up a solo 401(k), the spouse can make employee contributions (up to $23,000 in 2025, plus a $7,500 catch-up contribution if age 50 or older) and receive employer contributions, further amplifying tax savings.

Healthcare Benefits

Hiring a spouse also unlocks tax-advantaged fringe benefits, particularly in the realm of health insurance. If the business is a sole proprietorship, the owner cannot deduct health insurance premiums for themselves directly as a business expense. However, by hiring a spouse and providing them with health insurance coverage, the business can deduct the full cost of the premiums as a business expense. This includes premiums for the spouse, the owner, and their dependents, effectively allowing the owner to cover their own health insurance costs in a tax-advantaged manner. For example, if a family’s health insurance premiums total $20,000 annually, deducting these as a business expense could save $6,400 in taxes for a couple in the 32% tax bracket. To qualify, the spouse must be a legitimate employee, and the business must offer the insurance as part of a formal employee benefit plan.

Other Tax Savings

Beyond health insurance, other fringe benefits can further enhance tax savings. For instance, the business can provide the spouse with tax-free benefits such as life insurance, education assistance, or a dependent care assistance program, all of which are deductible by the business and excluded from the spouse’s taxable income. Additionally, if the business reimburses the spouse for business-related expenses—such as travel, meals, or home office costs—under an accountable plan, these reimbursements are deductible by the business and tax-free to the spouse. These benefits not only reduce the business’s taxable income but also allow the couple to cover personal expenses in a tax-efficient manner.

A unique tax advantage for sole proprietorships hiring a spouse is the exemption from certain payroll taxes. Unlike other employees, a spouse employed by a sole proprietorship is not subject to Federal Unemployment Tax Act (FUTA) taxes, which can save the business 6% on the first $7,000 of wages (up to $420 per year). However, the spouse’s wages are still subject to Social Security and Medicare taxes (FICA), which total 15.3% (split between employer and employee portions). While this may seem like a drawback, paying FICA taxes ensures the spouse earns Social Security credits, which can increase their future benefits, particularly if they have a limited work history.

Despite these advantages, hiring a spouse requires careful planning to avoid IRS scrutiny. The IRS may challenge the arrangement if the spouse’s role appears to be a sham or if their salary is unreasonably high for the work performed. To mitigate this risk, the business should maintain detailed records, including a written employment agreement, timesheets, and evidence of the spouse’s contributions. Additionally, the couple should consider the impact on their overall tax situation, as shifting income to the spouse could affect eligibility for certain tax credits or deductions. Consulting a tax professional is advisable to ensure compliance and optimize the strategy.

In conclusion, hiring a spouse offers small business owners a range of tax advantages, from deductible wages and retirement contributions to tax-free fringe benefits and payroll tax savings. By carefully structuring the arrangement and maintaining proper documentation, couples can reduce their tax burden, enhance their financial security, and align their business and personal goals. This strategy exemplifies how thoughtful tax planning can transform a family business into a vehicle for both economic success and long-term wealth-building.

This article is for informational purposes only. Infinium Investment Advisors, LLC does not provide tax or legal advice. Please consult your own tax advisor before making any financial decisions.