Small Business Tax benefits of Putting Spouse on Payroll
1. Build up tax-favored funds for retirement.
If you meet the tax-law requirements, 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 $54,000, whichever is less.
With a 401(k) plan, another dollar limit applies: Your spouse can defer up to $18,000 to the plan in 2017 (plus an extra $6,000 if he or she 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.
If you operate a C corporation, any compensation you pay to your spouse would have to stay with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you’ll save tax overall if your spouse draws a salary.
3. Get more tax mileage from business trips.
Generally, you can’t deduct the travel expenses attributable to your spouse if he or she accompanies you on a business excursion. 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 the meal expenses. The benefit is also tax free to your spouse.
4. Cure health insurance coverage ills.
If you’re already paying more to cover your spouse under your company health insurance plan, hiring him or her shifts the expense to your company. Typically, your company can deduct your spouse’s full health insurance cost.
5. Join the employer-paid life insurance group.
Your spouse is entitled to the same group-term life insurance coverage as your other employees.