Yes, you can absolutely pay your spouse a salary if they perform legitimate services for your business. This practice is common and can offer several benefits, but it's crucial to understand the associated tax implications, particularly regarding their role as an employee versus a business partner.
Paying Your Spouse as an Employee
When your spouse works for your business as an employee rather than a partner, their wages are subject to specific tax rules, similar to any other employee.
Key Tax Considerations:
- Income Tax Withholding: Wages paid to your spouse as an employee are subject to federal income tax withholding, just like wages paid to any other staff member.
- Social Security and Medicare Taxes (FICA): If your spouse is your employee and not your partner, you, as the employer, must pay Social Security and Medicare taxes for them. The wages for their services in your trade or business are subject to these taxes.
- Federal Unemployment Tax (FUTA): A notable exception for spouses working as employees is that their wages are not subject to Federal Unemployment Tax.
This means that while you'll handle payroll, withholdings, and pay the employer's share of FICA taxes, you won't owe FUTA tax on their earnings.
Why Consider Paying Your Spouse a Salary?
Employing your spouse can be a strategically sound move for various reasons:
- Business Expense Deduction: The salary paid to your spouse is a legitimate business expense, which can reduce your business's taxable income.
- Building Social Security Benefits: By paying Social Security and Medicare taxes, your spouse contributes to their own Social Security earnings record, which helps qualify them for future benefits.
- Retirement Contributions: If your business offers a retirement plan (like a 401(k) or SEP IRA), your spouse, as an employee, can contribute to it, further enhancing your family's retirement savings.
- Income Splitting: In some cases, paying your spouse a salary can help shift income, potentially lowering your overall household tax liability if one spouse is in a lower tax bracket.
- Childcare Benefits: If your business provides childcare benefits, your spouse, as an employee, might be able to utilize them.
Important Considerations and Best Practices
To ensure compliance and maximize benefits when paying your spouse:
- Legitimate Services: Your spouse must perform real, necessary work for the business. The IRS scrutinizes "sham" employment arrangements.
- Reasonable Compensation: The salary paid must be reasonable for the services performed. It should align with what you would pay an unrelated individual for similar work, taking into account their qualifications and the market rate for the position.
- Formal Employment: Treat your spouse like any other employee. This includes:
- Having a clear job description.
- Maintaining timesheets or records of hours worked.
- Running regular payroll.
- Withholding appropriate taxes.
- Issuing a W-2 form at the end of the year.
- Distinguish from a Partner: If your spouse is a co-owner of the business and shares in profits and losses, they are likely considered a partner (or a co-owner in a qualified joint venture for spouses who are sole proprietors), which has different tax implications (e.g., self-employment tax on their share of profits rather than FICA taxes on wages).
Tax Obligations at a Glance: Spouse as Employee vs. Partner
Understanding the differences in tax obligations is crucial:
| Feature | Spouse as Employee | Spouse as Business Partner (e.g., Partnership, Qualified Joint Venture) |
|---|---|---|
| Income Tax Withholding | Yes, for federal and state income taxes | No, partners pay estimated taxes on their share of income |
| Social Security & Medicare Taxes | Yes, both employer and employee portions (FICA) | Yes, self-employment tax on net earnings from the business |
| Federal Unemployment Tax (FUTA) | No | No |
| Payroll Requirements | Yes (W-2 issued, regular payroll processing) | No (K-1 issued for partnerships) |
| Deductibility | Salary is a deductible business expense | Partner's draw is generally not a deductible business expense |
For detailed information on married couples in business and their tax obligations, you can refer to resources from the Internal Revenue Service (IRS), such as their guidance on Married Couples in Business.
