Finances and Taxes

How to Hire Your Spouse and Save on Taxes

Amy Northard CPA, The Accountant for Creatives 
husband and wife partnership taxation

There are many benefits to being married, but here’s one you might not be aware of: Hiring your spouse as an employee or as a business partner can reduce your taxes as a couple. 

Of course, making the decision to go into business or working with your spouse should be about more than just money. This could affect your relationship, so make sure you want to work together every day, and set boundaries to keep it healthy and fulfilling for you both. 

Hiring my husband as my business partner two years ago was undoubtedly a great choice for my life and business. Still, it hasn’t been without its ups and downs. Here’s some of what we’ve learned along the way—and what you should know before you and your honey take this step. 

The Tax Benefits

First, let’s talk about the money. There are a couple ways to bring your husband or wife into the fold of your business, and they both have different benefits for taxation. 

You want your spouse to be actively involved in the business

Hiring your spouse as an active partner or employee doesn’t just mean you’ll get their expertise—it means your family and your business could save big. Here’s how: 

  • Potential health insurance savings: If your spouse is currently a dependent on your health insurance plan, it may be cheaper to cover them as an employee. Plus, any money you put toward your spouse’s premiums will be a deductible expense.
  • Writing off retirement: If your spouse is an employee and your company has a retirement plan, you can help them grow their retirement savings while helping your business save, too. Contributions your company makes to employees’ retirement plans are tax-deductible, up to 25% of their salary, or $57,000 for 2020 ($56,000 for 2019). Assuming you’re together until old age, this essentially means you’re able to put money toward your shared future while writing it off for your business. 
  • Tax-free travel: If you’re in business with your spouse, you may be able to go on some fun trips together—and write it off on your taxes. Of course, this doesn’t mean you can plan a getaway to Fiji just for fun and deduct it all. Still, if you’re on a legitimate business trip and your spouse has a legitimate business reason to be with you, then this can be a nice cost savings.
  • Deducting other benefits: In addition to the above, hiring your spouse as an employee will incur costs to your business like FICA taxes, and other potential benefits you provide, like life insurance. Many of these things are deductible expenses for your business, and you’ll improve your spouse’s life—as well as the lives of your employees—by providing them.

If you’re bringing your spouse on as a partner (i.e., owner) rather than an employee, you’ll see most of the above benefits , plus a few other gems:

  • Double the pass-through, double the fun: When you’re in a partnership, you and your spouse both qualify for the 20% pass-through tax deduction for small-business owners that was part of the Tax Cuts and Jobs Act. Once you divvy up the profit based on your ownership percentage, each of you qualified for the 20% pass-through deduction on that share. 
  • Less risk of getting audited: Studies have shown that the IRS audits partnership returns less frequently than Schedule C returns, so by going into business together, you’re potentially saving yourself from a lot of hassle. 
  • No need to run payroll: Assuming you don’t have any other employees and your business is structured as a partnership, you don’t have to worry about running payroll or determining each of your reasonable compensation. You both simply earn your portion of what the business makes. 

You want to save money but don’t want your spouse to be involved

There’s a little-known tax trick that you can use if you want to save some tax money but not actually work with your spouse: bringing them on as a limited partner. By doing this, they basically become an investor and nothing more—they cannot make important decisions regarding the company’s growth and cannot work in excess of 500 hours in a given year. If the IRS deems your spouse an active partner in the business, they can reclassify your income as nonpassive and disallow any passive losses you’ve claimed.

You’ll still get the partnership benefits of lowering your audit risk, avoiding payroll hassles, and enjoying the pass-through deduction for both of you. Your spouse also doesn’t have to pay self-employment tax on their income since they’re not actually working for the business.  

The Personal Pro-Tips

While hiring your spouse as your business partner can help your taxes, it can also hurt your relationship if not done right. Here are a few things to keep in mind to keep everyone happy. 

Stay in your lane

When you know someone as intimately as your spouse, it can be easier to cross boundaries that you wouldn’t with a regular employee. For instance, you probably wouldn’t just step in and take over a project from someone you hired to do marketing. But you’re more likely to tell your spouse exactly how you think it should be done. On the flip side, I see some couples try to make every single business decision together, leading to redundant, inefficient work. 

Instead, we’ve found it best to define early on the areas of the business that each of us would own, and do our best to stay in those lanes. 

Yes, you trust your spouse’s opinion. Yes, you still might ask them for their thoughts on something, even if it’s not “their job,” just like you might with your spouse over dinner if you worked at separate companies. But having defined responsibilities has helped keep the peace in so many situations, and let us both play to and honor each others’ strengths. 

Devote time to your personal relationship, too

Just like when you work from home, it’s critical to have boundaries when working with your spouse. Otherwise, every date night can quickly turn into a business meeting!
So set some boundaries that ensure you’re devoting time to building your relationship just like you would to building your business. That’s not to say that there always has to be a hard divide between business and pleasure—we recently went on a “money date” where we went away to both celebrate our anniversary AND talk about the future of the business. Just make sure you’re giving ample attention to both.

Updated: February 12, 2020

Amy Northard
Amy Northard Amy is the Accountant for Creatives®. She is a Certified Public Accountant (CPA) who specializes in working with creative small business owners to make taxes and bookkeeping less stressful. In addition to preparing tax returns and bookkeeping for clients all over the U.S., Amy enjoys teaching small business financial basics through her online course Be Your Own CFO.

Comments

*Required fields

Your email address will not be published.

Back to top