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Hire your spouse?

  
There are several perks for hiring your spouse:

Section 105 plan medical coverage makes the premiums for spousal coverage a business deduction not a personal one.  This may save your family social security tax on the spouse.  The self-employed medical plan is deductible on page one of the form 1040 as a self-employed health plan even if you do not have a section 105 plan.  With the section 105 plan covering the spouse in a family plan, the entire cost of the family health plan is deductible as a business expense.  Where you take this deduction depends upon the type of business.  There are a lot of details to work out.  Usually it is a good idea to have the plan professionally managed by an outside company, such as, TASC (total adminstrative services corporation www.tasconline.com).

The spouse can take advantage of the tax-free $50,000 of employer-paid group-term life insurance coverage.

The spouse can accrue tax-deferred retirement contributions to a qualified retirement plan.  A defined contribution plan would allow up to the lesser of 25% of compensation or $49,000.  A 401(k) plan would allow up to $16,500 if under age 50, and $22,000 if aged 50 or above.  A simple 401(k) plan for under age 50 has an $11,500 limit and for age 50 and over has a $14,000 limit.  A Simple IRA for age 50 and over has a $14,000 limit.  Income up to $245,000 can be considered for employer matching contributions.  This area tends to be complex, so consult with someone knowledgeable in this area to develop a good plan.

Paying your spouse will also shift income from the C-corporation to your personal 1040 which could be a good thing or a bad thing depending upon the tax brackets.  S-corporation owners generally cannot deduct fringe benefits, such as group-term life insurance and company health insurance plans.  IRS has been auditing section 105 plans looking for chinks in the armor, such as, no employment contract, no time cards, or other deficiencies.  The IRS has had some success where employing the spouse has been been ruled not bona fide.


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