Put Spouse (and kids) on the Payroll and Grab 7 Quick Tax Breaks

Does your business need trustworthy and reliable employees? You may not have to look farther than your dinner table.  Here's the strategy: Hire your spouse to work as an official employee. Why?  Consider these tax perks:

 1) Build up tax favored funds for retirement - If you meet the criteria, your company can deduct contributions made to a qualified retirement plan on your spouse's behalf.  The annual limits are quite generous.  If your company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $51,000, whichever is less.  With a 401(k) plan, another dollar limit applies: Your spouse can defer up to $17,500 to the plan (plus an extra $5,500 if she/he is age 50 or older).  Your company can match those contributions wholly or partially up to tax-law limits.

2) Shift taxable income away from the company - This is only true if your business is organized as a C corporation, and if your personal tax bracket is less than the corporations tax bracket. You'll save tax overall if your spouse draws a salary.  If you have an S corporation, you report your corporate income on your personal tax return anyway, so no benefit there. 

3) Get more tax mileage from business trips - Generally, you can't deduct travel expenses attributable to your spouse if he or she accompanies you on a business trip.  However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging, and 50% of meal expenses.  The benefit is also tax free to the spouse.

4) Cures health insurance coverage ills - If you're already paying more to add on your spouse under your company health insurance plan, hiring him or her shifts the expense to your company.  Typically, most companies charge the employee for the spouse's add on cost.  Even self-employed's can write off 100% of the cost if the policy is in the name of the spouse and they're on the payroll.

5) Join the employer-paid life insurance group - Your spouse is entitled to the same group-term life insurance coverage as your other employees.  The first $50,000 of coverage is tax-free to an employee.  One catch for S Corp owners - you can't deduct fringe benefits, such as group-term life insurance for any employee who owns 2% or more of the company.  By attribution, that rule applies to a spouse also.

6) No FICA withholding required for kids under 18 - Owners do not have to withhold FICA (Social Security and Medicare taxes) on kid's payroll.  But you need to actually work in the business.