Should I Pay My Spouse for Working in the Family Business?

If you are a professional like an attorney or doctor with your own practice or you run another type of family business, there is a good chance that your spouse works for the family owned enterprise.  Experienced Louisiana tax attorney Paul A. Grego often receives questions about the tax implications and merits of paying one’s spouse a salary.  Many people simply elect not pay their spouse a salary to avoid the payroll taxes because the income/profit will end up in a joint bank account so there is no justification for incurring the additional payroll tax obligation.  However, Mr. Grego has provided some reasons that it may be worth paying your spouse a salary:

Deduction of Medical Insurance Premiums: If the business owner is currently deducting family medical expenses on the first page of the 1040, a tax savings can be generated by making one’s employee spouse the insured.  This makes the medical insurance a business expense that may be reported on Schedule C.  When this slight adjustment is made, the parties receive a 3.8 percent savings on the Medicare portion of the self-employment tax.

Maximizing the Dependent Care Credit: The parties cannot qualify for the dependent care credit unless both spouses have earned income.  If you pay your spouse a salary, you may claim the earned income credit of up to $1,200.

Increasing Future Social Security Benefits: The amount of social security payments received by a person is based on his or her 35 highest earning years.  The income paid through the family owned business may be factored in with income during other years to increase this benefit level.

Building Credit: This situation may be relevant if the parties switch roles as the primary breadwinner in the future.  The owner of a professional practice may decide to take time out of the workforce for pregnancy or to care of young children.  In this situation, the fact you paid your spouse made a salary may make it easier for the spouse to qualify for credit later in the relationship.

These are just a few ways that slight changes in the structure of your professional practice or family business can yield positive tax consequences.  Mr. Grego frequently assists clients in structuring their business in a manner to minimize their tax burden and increase their take home pay.  If you have questions about optimizing your business structure to maximize tax avoidance, Mr. Grego provides effective business planning.  If you have tax questions, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.