Are there any advantages to hiring one’s spouse from a tax perspective?
If it’s a sole prop or LLC, you don’t have to pay Federal Unemployment Tax (FUTA) when you hire your spouse. Other than that, you still have to pay Medicare, social security taxes for them. They are also still subject to federal income tax withholding, just like any other employee.
In short, there’s a small benefit (6% up to the first 7,000 in salary, though in most states it is reduced to 0.6% when paying state unemployment insurance taxes.) The exceptions are California and New York, which credit 4.5% instead of the 5.4% of other states, making FUTA tax rates 1.5%.
If you’re only paying 0.6% or 1.5% less taxes to hire your spouse, it might not be worth it. The exception is if you really like working with your spouse as well as living with them. Many people like the space that work provides, but that’s a decision you have to make yourself.
The real benefit would come from further deductions of meals, business travel, cell phones, etc., for business use. You can also increase your retirement plan contributions if your spouse is also able to add money.
What if my spouse works the business alongside me? What then?
First off, a business jointly owned and operated by a married couple is a partnership. They should file form 1065, U.S. Return of Partnership Income…
Unless…
They qualify and choose to have the business treated as a qualified joint venture (or operate in a community property states). Married people might choose this because it’s less paperwork. They don’t have to file form 1065 and just report each of their share of the income and expenses on schedule C. This division of income may mean a lower tax bracket for both spouses on some of their income. Each spouse would keep direct control over their own share of the venture’s business income and expenses.
If you choose the qualified joint venture option, each spouse is treated on their taxes like a sole proprietor (their own individual business owner). Here are the requirements for that:
Requirements for Qualified Joint Venture:
- The members must be a married couple who file jointly
- They must be co-owners and operators of the business
- They must both ‘materially participate’ in the business, or maintain a farm as a rental business without materially participating in its operation or management. (Materially means 500 hours of working on the business during the tax year, or any of these other 6 tests.)
- Both spouses must elect qualified joint venture (QJV) status on Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. That means each spouse filing these forms: Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040). Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment tax.
In case you were wondering, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.
In Conclusion
Hiring your spouse as an employee only reduces your taxes 0.6% in 48 states and DC, compared to hiring someone else. This is because you’re not required to pay unemployment tax. If your business is a corporation, however, you still have to pay even that.
You also know more about qualified joint ventures, and why a married couple might choose that instead of filing as a partnership.
Whether you’re a partnership, a QJV, or work with their spouse, I can help you with your bookkeeping. I can save you (or your spouse) 80+ hours per year, compared to you doing it alone. Use that time to earn more money or get some much needed rest. Schedule a call with me to talk about your business goals and what you’ll want from your bookkeeper.