Should You Hire Your Spouse in Your Professional Micro-Corporation?

At SimpliMD, we understand the importance of maximizing every opportunity for tax savings while building your micro-corporation. Hiring your spouse is a decision that carries significant implications, both financially and personally. Let's delve into the tax advantages and considerations of bringing your spouse into your business fold.

As we jump into this exploration, I want you to know that I do employ my stay at home wife as my professional micro-corporation bookkeeper. The primary financial benefits are retirement savings and fringe benefits, but I believe the non-financial benefits are just as important.

The Intangible Non-Financial Benefits of Employing Your Spouse

While the financial advantages of hiring your spouse in your micro-corporation are undeniable and we’ll discuss them later, there are also intangible benefits that extend beyond monetary considerations. One such benefit revolves around fostering a deeper sense of connection and involvement between you and your spouse in your professional endeavors. Let's explore how employing your spouse can enrich both your professional and personal lives.

1. Enhanced Collaboration and Shared Goals

Bringing your spouse into your micro-corporation creates opportunities for collaboration and shared goal-setting. Instead of leading separate professional lives, you and your spouse can work together towards common objectives, aligning your efforts to achieve mutual success. This collaborative approach fosters a sense of unity and teamwork, strengthening the bond between you and your spouse.

2. Increased Involvement in Your Professional Journey

For many spouses, particularly those who are primarily caregivers or homemakers, being employed within the micro-corporation provides a sense of inclusion in your professional journey. It allows them to actively participate in your business activities, gain insights into your work environment, and contribute to your shared vision. This increased involvement can lead to a greater appreciation for the challenges and triumphs you experience in your professional life.

3. Shared Sense of Purpose and Contribution

Employing your spouse in your micro-corporation gives them a platform to contribute their skills and expertise towards a common purpose. Instead of feeling disconnected from your professional endeavors, they can actively contribute to the success of the business, whether it's through administrative support, client interactions, or project collaboration. This shared sense of purpose instills a feeling of pride and accomplishment in both you and your spouse.

4. Strengthened Family Dynamics

By integrating your spouse into your micro-corporation, you create opportunities for meaningful interactions and shared experiences within the family unit. Working together towards common goals fosters open communication, mutual respect, and a deeper understanding of each other's roles and responsibilities. This, in turn, strengthens the overall dynamics of your family, creating a supportive and cohesive environment where everyone feels valued and respected.

5. Flexibility and Work-Life Balance

For many couples, employing a spouse in the micro-corporation offers flexibility and the ability to maintain a healthy work-life balance. Your spouse may have the flexibility to adapt their work schedule to accommodate family commitments or pursue personal interests while still actively contributing to the business. This flexibility fosters a sense of empowerment and autonomy, allowing your spouse to balance their professional responsibilities with other aspects of their life.

1. Connecting Your Stay-at-Home Spouse to Your Professional World

For a stay-at-home spouse, being employed in your micro-corporation can bridge the gap between their domestic role and your professional world. It provides them with a meaningful outlet to contribute their skills, talents, and perspectives, thereby fostering a deeper connection to your work and the broader business community. By involving your spouse in your professional endeavors, you not only enhance the financial viability of your micro-corporation but also enrich your relationship and family life in profound and meaningful ways.

The Tangible-Financial Considerations To Hiring Your Spouse

Let me start by saying that hiring your spouse in your business can offer notable tax advantages, but if you do it for the wrong reasons could also cost your more in taxes. Do not get into the trap thinking that paying your spouse wages decreases business income and saves your taxes. Now lets’ unpack why this is true.

In the realm of tax optimization, there are three primary scenarios where incorporating your spouse into your business structure can yield substantial benefits:

1. Maximizing Retirement Contributions:

   • If you're already maximizing your retirement contributions as the business owner, bringing your spouse on board can further enhance your savings potential.

   • For instance, envision you're an S Corp owner with a Solo 401(k) plan. By employing your spouse, you can increase the amount you contribute towards retirement significantly.

2. High Health Costs Beyond Insurance:

   • Hiring your spouse can serve as a strategic move to leverage business deductions for substantial medical expenses.

   • Utilizing Section 105 or HRA plans can convert personal medical costs into deductible business expenses, provided your spouse is a legitimate employee.

3. Accessing Fringe Benefits:

   • Certain fringe benefits, such as group term life insurance and working condition benefits, can be extended to your spouse, offering additional tax advantages.

At SimpliMD, we emphasize maximizing retirement contributions and addressing high health costs as the primary motivations for hiring your spouse, rather than relying solely on fringe benefits.

Supporting Your Decision

Before proceeding, it's crucial to ensure that hiring your spouse aligns with your business's needs and complies with regulatory standards. Here's how you can navigate this process effectively:

1. Documented Work Contributions:

   • Maintain clear documentation of your spouse's role and the time dedicated to business-related activities, substantiating their employment status.

2. Fair Compensation:

   • Determine a reasonable wage based on your spouse's responsibilities and hours worked, ensuring compliance with fair compensation standards.

3. Transparent Financial Transactions:

   • If utilizing tax-free benefits for health-related expenses, establish transparent processes for reimbursement, adhering to Section 105 or HRA plan guidelines.

4. Ownership Structure:

   • In certain business entities like sole proprietorships or partnerships, it's essential to clarify that your spouse's role is that of an employee, not an owner.

Considerations and Potential Drawbacks

While hiring your spouse can yield significant tax advantages, it's essential to weigh these benefits against potential drawbacks:

1. Increased Payroll Taxes:

   • Incorporating your spouse may lead to higher payroll taxes, including Social Security and Medicare contributions. However, the tax savings from retirement planning can offset these costs.

2. Audit Risks:

   • Implementing this strategy requires meticulous record-keeping and adherence to regulatory guidelines to mitigate the risk of audits or scrutiny.

Navigating Your Decision

At SimpliMD, we recognize the gravity of the decision to hire your spouse and advocate for a comprehensive understanding of the tax implications within your broader business strategy.

If you are looking for a quick business consultation on how to maximize your professional micro-corporation, reach out to me today for a $99 consultation and I would be delighted to coach and guide you.

In summary, while incorporating your spouse into your micro-corporation can offer substantial tax benefits, it's imperative to approach this decision thoughtfully and seek professional guidance. By aligning your actions with your business goals and regulatory requirements, you can leverage this strategy to optimize both your financial outcomes and personal relationships.

Two additional articles you might consider reading if you want more information include:

• “Hiring Your Spouse: Business Boost or Bust?” by Mike Jesowshek CPA, from our SimpliMD professional network. By the way, Mike’s tax planning product TaxElm is a great resource for you to consider using to help with questions like this and the tax optimization of your micro-business. I look at this product as an economical fusion of DIY and professional outsourcing of tax planning for your business. You can check it out here.

• “Can I Hire My Spouse as an Employee?” by Dr. James Dahle with the White Coat Investor