Your Partner in Business & Tax Savings

If you’re starting a business, or your family has one, you might have thought about working with your spouse. Good news! Besides just teamwork, bringing your spouse into your business officially can actually help you save money on taxes. But, it’s not a free-for-all. You need to follow the IRS rules very carefully and show that your spouse genuinely has a role in the business – it can’t just be a “paper” job to lower your tax bill.²

At Slim Tax, we help business owners figure this stuff out. This guide will walk you through how to involve your spouse in your business to legally reduce taxes, without getting on the IRS’s bad side.

I. Why Involve Your Spouse? The Big Picture

The most important rule here is that your spouse must actually do real work for the business. And, the business needs to follow all the tax laws to the letter. The IRS tends to look closely at businesses that employ family members,¹ so careful planning, good records, and always playing by the rules are super important.

Lots of times, a spouse helps out informally at first. But to get real tax breaks – like being able to deduct health insurance costs using something called a Section 105 Health Reimbursement Arrangement (HRA for short)² or putting more money into retirement accounts¹¹ – you need to make their role official. This means things like running payroll and keeping detailed records,¹³ so you’ll want to make sure the tax savings are worth the extra admin work.

II. What’s Your Spouse’s Official Role? Employee, Partner, or something else?

How you classify your spouse’s role in the business (like an employee, a partner, or part of what’s called a Qualified Joint Venture or QJV) is a big deal. The IRS has specific rules for each, and it affects your taxes differently.¹⁷

A. Spouse as an Employee

This is like a typical job. One spouse (the boss) controls the major business decisions, and the other spouse (the employee) works under their direction.¹⁷

What it means for taxes:

• Paychecks & Withholding: Their wages will have income taxes taken out, just like any job.¹³
• FICA Taxes: These are Social Security and Medicare taxes. Both the employee-spouse and the business pay their shares.¹³
• FUTA Tax Break: Usually, wages paid to your spouse if you’re a sole proprietor (just you own the business) or a single-owner LLC are exempt from FUTA tax (Federal Unemployment Tax).¹³ If the business is a partnership or corporation, it generally does have to pay FUTA tax for an employee-spouse.²⁰
• Rules to Follow: You have to do all the normal employer stuff: payroll, tax deposits, and sending out tax forms (like a W-2 for your spouse).

B. Spouse as a Partner

This is when you and your spouse co-own and run the business together, sharing in the profits or losses and having a say in how things are run.¹⁷

What it means for taxes:

• Partnership Tax Return: The business files a Form 1065.¹⁷
• Schedule K-1: Each spouse gets this form showing their share of the business’s income, deductions, etc.²¹
• Self-Employment Tax: Each spouse pays this tax (it covers Social Security and Medicare for self-employed folks) on their share of the business’s net earnings.¹⁸
• Estimated Taxes: Partners usually pay their income taxes in quarterly installments throughout the year.²³
• No W-2s for Partners: Partners aren’t considered employees for the work they do as partners. Any payment for their services might be called “guaranteed payments,” which are also subject to self-employment tax.²⁵

C. The Qualified Joint Venture (QJV) Election

This is a special option (thanks to IRS rule Sec. 761(f)) that lets some married couples who run an unincorporated business together choose not to be treated as a partnership for federal taxes.¹⁷

Who can do this? (QJV Requirements):¹⁷

1. The only owners are a married couple who file their taxes together (jointly).
2. Both spouses are actively involved in running the business (this is called “material participation,” and it’s important²⁰).
3. Both spouses agree to be treated as a QJV (you usually do this when you file your taxes).
4. The business must be co-owned by both spouses and not set up as a formal legal entity like a partnership or (in most cases) an LLC. There’s an exception: if you’re in a community property state and your LLC is owned as community property, you might still be able to choose QJV status.²⁶

How QJV taxes work:¹⁷

• You don’t file a partnership tax return (Form 1065).
• All the business’s income, expenses, etc., are split between the spouses. Each spouse reports their share on their own Schedule C (or Schedule F for farming) with your joint Form 1040 tax return.
• Each spouse pays self-employment tax on their share of the profit. This is good because it means both spouses build up their own Social Security and Medicare credits.¹⁷

The key difference often comes down to “control.” If one spouse is clearly in charge, it looks more like an employer-employee setup.¹⁷ If it’s more of an equal say, it looks like a partnership.¹⁷

Quick Comparison: Spouse’s Role

(Info in this table comes from IRS documents¹⁷ and other tax resources^{13, 18, 21, 23})

III. Making Sure Your Spouse’s Employee Role is Legit

If you decide to treat your spouse as an employee to get certain tax benefits, the IRS needs to see that this is a real job, not just a setup to avoid taxes.² If it’s not legit, you could lose deductions and face penalties.

What makes it a real employee role? (Based on²):

1. Spouse Isn’t a Co-Owner (of that specific part of the business): For benefits like a special health plan (105-HRA), the employee-spouse usually shouldn’t also be a co-owner of the business assets tied to their job. Think of it like this: the business bank account and contracts for that part of the work should mainly show the owner-spouse is in charge.
2. Spouse Does Real Work: They must do actual tasks that are normal, necessary, and helpful for the business.² It should be work you’d reasonably pay someone else to do.²⁸
3. Spouse Gets Paid: You need to pay them for their work. This can be wages, tax-friendly benefits, or both. It should be official, like regular paychecks or documented reimbursements for expenses.²
4. Spouse Works Under Your Direction: The owner-spouse should be the one guiding the employee-spouse’s work and making the main management decisions for those tasks. This is part of the “right of control” test the IRS uses.¹⁵
5. Pay is “Reasonable”: The total pay (wages + benefits) must be fair for the work they actually do. (More on this next!)

IV. Paying Your Spouse Fairly: What’s “Reasonable Compensation?”

“Reasonable compensation” basically means paying your spouse what you’d pay someone else for the same job, in a similar business, under similar circumstances.³ There’s no magic number; the IRS looks at all the facts.

• If Pay is Too High: The IRS might say you’re overpaying to sneak out profits without proper taxes. They could disallow the deduction for the extra amount and treat it as something else (like a dividend, which is taxed differently, or a gift).³
• If Pay is Too Low (especially in S-Corps): If you’re an S-Corporation (a type of business structure) and you pay your spouse (who is also a shareholder) a tiny salary to avoid payroll taxes, the IRS can step in. They might reclassify some of your business profits as wages, meaning you’ll owe those payroll taxes plus interest and penalties.¹⁶

What the IRS looks at to decide if pay is fair:³

• About Your Spouse: What are their duties? What training, education, or experience do they have for the job? How much time and effort do they put in?
• About Your Business & Industry: What do similar businesses pay for similar jobs in your area? How is your company doing financially? How complex is it?
• Your Business & Your Spouse: Does your spouse have a lot of control in the company (which might let them set their own pay too high)? Are you consistent with how you pay everyone (family and non-family)?
• The “Independent Investor” Test: Would an outside investor in your company think the pay is fair, considering how well the business is doing and how much your spouse contributed to that success?³⁵

How to show pay is reasonable (good record-keeping tips from⁴):

1. Do Your Homework: Look up what similar jobs pay. Use resources like the Bureau of Labor Statistics or industry salary surveys. Keep records of what you find.
2. Write Clear Job Descriptions: Detail your spouse’s duties, responsibilities, skills needed, and time commitment.
3. Keep Formal Records: If you’re a corporation, decisions about pay should be in official meeting notes. For any business, keep clear records of work done (like timesheets) and why pay is set at that level.
4. Do Annual Reviews: Review your spouse’s pay each year and adjust it if their duties change, the business does better, or industry pay rates change. Write down why you made any changes.
5. Be Consistent: Pay family and non-family employees in similar roles in a consistent way.
6. Look at the Whole Package: “Compensation” includes cash wages PLUS the value of any benefits (like health insurance or retirement contributions). The total package must be fair for the work done.

V. More Than Just Salary: Using Benefits for Tax Savings

Often, paying your employed spouse with tax-friendly benefits can save more on taxes than just giving them cash wages.² Some benefits aren’t taxed as income for your spouse, and your business can still deduct them as an expense – a win-win!

A. Health Benefits – A Big Opportunity!

1. Section 105 Health Reimbursement Arrangements (105-HRAs): These are especially good for small businesses like sole proprietorships or partnerships where your spouse is the only employee (or the only one getting these benefits).²

   • How it works: The business sets up an official HRA plan. Your spouse typically buys their own health insurance policy (which can cover the whole family). Then, the business pays your spouse back (reimburses them) for the insurance premiums. The HRA can also reimburse your spouse for other medical, dental, and vision costs for the family that insurance doesn’t cover.²
   • Tax Impact: These reimbursements are tax-free to your spouse!² And, the business can fully deduct them as an employee benefit expense.² This is usually much better than trying to deduct medical expenses on your personal tax return.
   • Super Important Rule: You absolutely must have a formal, written plan document for the 105-HRA to be valid.²
   • S-Corp Note: This usually doesn’t work as well for S-Corp owners who own more than 2% of the company (or their spouses).²

2. HRAs and Health Savings Accounts (HSAs): If you want to use both an HRA and an HSA (an account for health expenses if you have a high-deductible health plan), you need to plan carefully. A standard HRA might prevent you from contributing to an HSA.⁴¹ There are special types of HRAs that can work with HSAs, like “Limited-Purpose HRAs” (only for vision/dental) or “Post-Deductible HRAs” (only pays after you’ve met your health plan’s deductible).⁴²

B. Help with Childcare Costs (DCAPs / Dependent Care FSAs)

Your business can set up a Dependent Care Assistance Program (often through a Flexible Spending Account or FSA). This lets your employed spouse use pre-tax money (up to $5,000 per household per year, or $2,500 if married filing separately⁴⁵) for things like daycare, so both you and your spouse can work.

• Owner Rule: There’s a rule that says no more than 25% of the money paid out by the DCAP can go to owners who hold more than a 5% stake in the business (including their spouses or dependents).³⁸

C. Other Cool Tax-Friendly Benefits

• Education Help: Your business can pay for or reimburse up to $5,250 per year for your spouse’s job-related education. It’s deductible for the business and usually tax-free for your spouse (again, there are limits if it mostly benefits owners).³⁸
• Group Term Life Insurance: The cost of up to $50,000 of this kind of life insurance can be tax-free for your spouse and deductible for the business (rules are different for S-Corp owners with more than 2% ownership).³⁸

How Your Business Type Affects Benefits

(General ideas from tax info source³⁸)

• Sole Proprietors/Partners: Usually, owners can’t get these employee benefits for themselves directly. But by officially hiring your spouse, your spouse (as the employee) can get them, which benefits your family.
• S-Corporations: For shareholder-employees owning more than 2% of an S-Corp, health insurance paid by the company is deductible by the S-Corp but usually has to be included in the shareholder’s W-2 income (though they might be able to deduct it on their personal tax return).
• C-Corporations: These generally offer the most freedom for providing tax-deductible benefits to owners who are employees (and their employed spouses) without it being taxable income to them.

Quick Look at Key Tax-Friendly Benefits

(Info from tax resources like^{2, 38, 41, 42, 45})

VI. Boosting Retirement Savings (and Lowering Taxes!)

When your spouse officially works for the business, it opens up more ways to save for retirement with tax advantages.⁴⁶ Money put into these retirement plans can often be deducted from your business income now, and it grows without being taxed until you take it out in retirement (or it might even be tax-free with Roth accounts).

1. SEP IRA (Simplified Employee Pension):

   • Only the employer (the business) puts money in.¹¹
   • Contribution Limits: Up to 25% of the employee’s pay, or $69,000 for 2024, whichever is less.¹¹ (For self-employed people, it’s effectively 20% of their net adjusted self-employment income.⁴⁸)
   • Fairness Rule: If you contribute for yourself, you must contribute the same percentage of pay for all eligible employees, including your spouse.¹¹

2. SIMPLE IRA (Savings Incentive Match Plan for Employees):

   • Good for businesses with 100 or fewer employees.⁴⁶
   • Employee Contributions: Your spouse can choose to save from their paycheck (up to $16,000 in 2024, plus an extra $3,500 if they’re 50 or older).¹¹
   • Employer Contributions: The business must contribute, either by matching what the employee puts in (up to 3% of their pay) or by contributing 2% of pay for each eligible employee, whether they save or not.¹¹

3. 401(k) Plans (including Solo 401(k)s):

   • Higher Employee Contribution Limits: Your spouse can save more from their paycheck here ($23,000 in 2024, plus $7,500 if 50+).¹¹
   • Flexible Employer Contributions: The business can choose to match employee savings or make profit-sharing contributions. Total contributions (employee + employer) are capped (e.g., for 2024, the lesser of 100% of pay or $69,000).¹¹
   • Solo 401(k): Awesome for businesses with no employees other than the owner and their spouse.¹¹ It lets both you and your spouse contribute as an “employee” (from paychecks) AND as the “employer” (profit sharing), which can really max out your family’s retirement savings.
   • Loans: Some 401(k) plans let you borrow money from your account.¹¹

4. Spousal IRA Rules: Even if your spouse earns very little (or nothing) from the business, they might still be able to contribute to their own Traditional or Roth IRA based on your income, as long as you file taxes jointly.⁴⁹ But, if your spouse is covered by a retirement plan at work (like one of the business plans above), their ability to deduct Traditional IRA contributions might be limited by your total household income (Modified Adjusted Gross Income, or MAGI).⁴⁹

Quick Look at Retirement Plans

(Info from tax sources^{11, 32, 49, 52} and general plan rules)

VII. How Your Business Type Changes Things

The way your business is legally set up (like a sole proprietorship, partnership, LLC, S-Corp, or C-Corp) really changes which spousal tax strategies you can use and how they work.⁴

• Sole Proprietorship (Just You):
  • Great for hiring your spouse as an employee and using that Section 105-HRA health plan (if your spouse is the only one eligible for those benefits).² Also, no FUTA (unemployment) tax on your spouse’s wages.¹³
  • Or, if you both work actively and co-own it, you might use the QJV option (but usually not if it’s an LLC, except in some states).¹⁷
• Partnerships and LLCs (Taxed as Partnerships):
  • If your spouse is a co-owner/partner: They get a K-1 form and pay self-employment tax on their share.¹⁸
  • If your spouse is an employee of the partnership/LLC: Possible, but their role needs to be clearly separate from being an owner. The partnership/LLC pays FUTA tax.¹⁷
  • Special rule for LLCs in “community property states”: You might be able to choose QJV treatment for your LLC (see IRS Rev. Proc. 2002-69).²⁶
• S-Corporations (S-Corps):
  • If your spouse works for the S-Corp and is a shareholder: They must get a reasonable W-2 salary for their work (which has payroll taxes taken out).¹⁶ Any profits left over can be given out as “distributions,” which usually don’t have payroll taxes.³²
  • Health insurance for a spouse who is a >2% shareholder-employee: The S-Corp deducts it, but it’s added to their W-2 income (they might be able to deduct it on their personal tax return).² The Section 105-HRA usually isn’t as good here.²
• C-Corporations (C-Corps):
  • Generally the most flexible for giving tax-free benefits to employees, including owners who work there (and their employed spouses).³¹
  • Big downside: “Double taxation.” The C-Corp pays tax on its profits. Then, if those profits are paid out to shareholders (like you or your spouse) as dividends, you pay personal income tax on them again.³¹ Businesses often try to reduce this by paying reasonable salaries and providing good benefits.

VIII. Smart Ways to Split Income and Deduct Expenses

A. Legally Splitting Income

This means shifting some of your business income from you (if you’re in a higher tax bracket) to your spouse (if they’re in a lower one). You do this by paying your spouse reasonable wages for real work they do. The business deducts these wages, lowering its taxable income.¹ Your spouse reports the wages as their income. It must be for genuine work and fair pay – no faking it just to move income around!³⁰

B. Deducting Your Spouse’s Travel Expenses (Tricky!)

The IRS is very strict here.²⁸ You can only deduct your spouse’s travel costs if:

1. They are a real employee of your business.
2. Their presence on the business trip is absolutely necessary for your business – not just helpful or social.²⁸
3. If you meet these rules, you can deduct their transportation, hotel, and meals (meals are usually only 50% deductible).
4. Even if their travel isn’t fully deductible, you can still deduct what it would have cost you to travel alone (e.g., if a single hotel room is $150 and a double is $200, you can deduct $150; the extra $50 for your spouse isn’t deductible).²⁸

C. Deducting Your Spouse’s Meal Expenses

Business meals are usually only 50% deductible.⁵⁷ For any meal to be deductible, it can’t be overly fancy, you or an employee must be there, and it must be with a business contact for a business reason. Your spouse’s meal is only deductible if they are an employee, their travel (if any) was necessary for business, and their being at the meal served a real business purpose tied to their job.⁵⁸

D. Home Office Deduction When Your Spouse is Involved

You can deduct expenses for a part of your home used exclusively and regularly for business if it’s your main place of business, where you meet clients, or a separate structure used for business.⁵⁹

• If Spouse is an Employee: Their use of the home office must also be for your convenience as the employer.⁵⁹
• If You’re a QJV: If both you and your spouse run the business as a QJV, and you each have your own qualifying home office space for your separate QJV work, you might each be able to claim a home office deduction on your separate Schedule Cs.⁵⁹

IX. Staying on the IRS’s Good Side: Records are Your Best Friend!

Keeping super detailed, accurate, and up-to-date records isn’t just a good idea – it’s a must, especially when family is involved. The IRS wants proof for all your income, deductions, and credits.⁴ Good records are your main defense if the IRS asks questions.

What Records to Keep:

1. Employment Agreements or Clear Role Descriptions: These should accurately describe your spouse’s duties, hours, and pay.
2. Detailed Timesheets & Work Logs: These are key to proving your spouse is a real employee.² They should show dates, specific tasks, and time spent – and be filled out regularly (daily or weekly). (Also, be aware of general labor laws like FLSA¹⁴).
3. Payroll Records & Tax Forms: If your spouse is an employee, keep copies of W-2s, quarterly tax filings (Form 941), and records of all wages paid and taxes withheld/paid.⁶⁰
4. Company Meeting Notes (if a corporation): If your business is an S-Corp or C-Corp, decisions about hiring your spouse, their role, pay, and benefits should be written down in official meeting minutes.¹⁶
5. Paperwork for Benefit Plans: Many tax-friendly benefit plans require official written documents (like for 105-HRAs² or DCAPs⁴⁵). Keep records of all payments made under these plans, including receipts or Explanation of Benefits (EOBs) your spouse submits.

   Tip

   For HRAs, it's a good idea for your spouse to pay for medical costs from their *own separate bank account* first, and then have the business reimburse them. This creates a clear paper trail.<sup><a href="https://bradfordtaxinstitute.com/Tools/Family-Premium.pdf" target="_blank" rel="noopener noreferrer">2</a></sup>
   

6. Proof for Specific Deductions: Keep travel logs,²⁸ meal receipts showing who, what, when, where, and why (business purpose!),⁵⁸ and records for home office expenses.¹⁰
7. Keep Business & Personal Money Separate: This is vital! Your business needs its own bank account and credit cards, completely separate from your personal accounts.² Ideally, your employee-spouse should also have a separate personal bank account where their wages and reimbursements are deposited.²

X. What Makes the IRS Suspicious? (Avoiding Audit Red Flags)

The IRS looks more closely at businesses that employ family members because there’s a higher chance things might be set up just to avoid taxes rather than for real business reasons.⁶

Common Mistakes People Make:

• Paying their spouse way too much or way too little (especially in S-Corps).³
• Not having good records or any records at all.¹⁰
• Not treating their spouse like a real employee (e.g., paying them informally, no W-2).
• Calling their spouse an independent contractor when they’re really an employee, or vice-versa.
• Messing up payroll taxes (not withholding enough, not paying on time).
• Just paying their spouse cash wages without using any of the cool tax-saving benefits, which can sometimes just increase overall payroll taxes for the family without much income tax savings.²
• Ignoring rules about treating all employees fairly when it comes to benefit plans (these are called non-discrimination rules).³⁸

Things That Might Make the IRS Look Closer (Audit Red Flags):

• How you classify workers (employee vs. independent contractor).⁶¹
• How much owners and their family members are paid, especially if it seems off.⁶¹ (For S-Corps, big profit distributions with tiny salaries are a red flag.³⁶)
• How you handle employee benefits and expense reimbursements.⁶¹
• Really big or unusual deductions related to hiring your spouse.

Basically, the IRS wants to know two things:

1. Is your spouse really an employee (or partner) doing real, necessary work?
2. Is their total pay (wages + all benefits) fair for the work they actually do, and similar to what you’d pay a non-family member for the same job?

If the answer to either is “no,” your whole tax strategy could fall apart if the IRS looks into it.

XI. Wrapping It Up: Smart Spousal Strategies = Good Planning + Following Rules

Bringing your spouse into your business can be a great way to legally lower your taxes and boost your family’s financial situation. But, you have to know the rules, pay attention to the details, and always make sure everything is legitimate and has a real business purpose.

Key Things to Remember:

• Get the Role Right: Is your spouse an employee, partner, or part of a QJV? This is step one.
• Real Job, Fair Pay: If they’re an employee, the job must be genuine, and the pay (including all benefits) must be reasonable for the work.
• Use Benefits Wisely: Tax-free benefits, especially for health costs (like a Section 105-HRA if it fits your business), can be much better than just cash wages.
• Boost Retirement Savings: Hiring your spouse can mean more money going into retirement accounts for your family’s future.
• Business Type Matters: What works for a C-Corp might not work for an S-Corp or sole proprietorship.
• Rules First, Tax Savings Second: Tax savings should come from legitimate business setups, not setups designed only to save tax.
• Records, Records, Records: This is your best defense. Keep detailed timesheets, work logs, plan documents, payroll records, and proof for all deductions.

Think of these strategies not just as ways to cut taxes now, but also as ways to build long-term wealth (more retirement savings!), manage risks (health benefits!), and give your spouse fair credit (like Social Security) for their work in the family business.

Ready to Explore These Strategies for Your Business?

Figuring out all the complex rules for involving your spouse in your business can be tough, especially since tax laws can change. Trying to do it all yourself is pretty risky. At Slim Tax, we know this stuff inside and out, and we can help you design and set up strategies that work for your business, keep you compliant, and save you money.

Get in touch with Slim Tax today. We’ll help you make sure you’re taking advantage of all the tax-saving opportunities available when your spouse is part of your business team, all while playing by the IRS’s rules!