Hire Your Spouse and Save
From smSmallBiz
WHEN DEAN BARBER, founder of the Barber Financial Group, a wealth management firm in Lenexa, Kan., hired his wife Kim about 12 years ago, their goal was to save money.
Dean needed to hire someone but was also in a pinch financially. So he turned to his wife, who had been home raising five children, and began paying her a modest salary to oversee marketing and human resources. He thought: "Her giving up her time would be less costly to the company as a whole than hiring an additional person." Today, the now thriving 21-year-old company has 20 employees, clients in 30 different states and earns roughly $2.4 million in revenue. And more than just cheap labor, the real benefit of having Kim around is that "there's nobody else who is going to care as much about your business as you and your spouse," he says.
Barber Financial Group founder, Dean Barber, hired his wife Kim to save money on labor and help the business grow.
While hiring a spouse will likely lead to one or two lover’s quarrels , the benefits can often outweigh potential downfalls. Indeed, say small-business consultants and accountants, whether it's moral support, less expensive labor or lower health-care costs, hiring a spouse can provide a number of advantages.
Here are few ways to benefit from putting your loved one on the payroll:
A Personal Interest
As Dean Barber found, the main benefit to hiring spouses is that "they have a personal interest in the company," says Carmen Bianchi, president of the Family Firm Institute in Boston. Being that couples, in many states, share each other's assets, whether or not a business is profitable typically also impacts a spouse. As such, if you're in a bind, a spouse may be more willing to work longer hours for less money than a regular employee. "That's why family businesses do better than regular businesses during a down economy," she adds.
Tax Savings
Kiddie Payroll
Business owners also might want to think about hiring their kids. Here are three reasons to put your teen to work:Save on taxes. If you're a sole proprietor or unincorporated business owner and typically if Junior is under 18, the wages a child earns from working for you aren't subject to Social Security and Medicare taxes. And like spouses, you won't owe federal unemployment tax either. You may, however, need to withhold federal and state income taxes from their wages.
Putting your kids on the payroll can also lower your taxable income. For example, if you were in the 28% tax bracket, and you paid your teen $10,000 to do filing and other odd jobs around the office, you'd lower your tax bill by $2,800. Dependent children can save on their earnings as well. For example, junior can earn wages up to $5,450 (the 2008 standard deduction) and not owe federal income tax.
Transfer wealth. Unlike a spouse whose income will typically combine with a business owner's by way of filing a joint return, children who have earned income will file their own returns. This means that you can effectively transfer some of your wealth to your kids without triggering the so-called kiddie tax, which is a law that says any amount of unearned income above $1,800 will be taxed at the parent's rate. As employees, children receive paychecks for actual services rendered. And if they do owe, they'll be taxed at a lower rate rather than a parent's typically higher income tax rate.
Note that payments must be "reasonable" in relation to the services rendered, says Robert Caplan, a Foster City, Calif., accountant. He adds that if you pay too much, you could lose the business expense deduction. It's also a good idea to keep a log of what Junior's responsibilities are and the time he or she spends at work.
Open an IRA. Another benefit of receiving earned income is kids can now start up individual retirement accounts. The contribution limit this year is $5,000 for people under 50. If kids owe tax, opting for a tax-deductible IRA may be an option. However, since young people generally pay fewer taxes, it may make sense to fund a Roth IRA instead. That way, children can pay the tax upfront but take those savings out tax-free when they retire.
While not exactly an earth-shattering savings, business owners who hire their spouses can avoid paying a federal unemployment tax on their spouse's earnings, says Robert Caplan, a Foster City, Calif., accountant. For 2008, the 6.2% federal unemployment tax applies to the first $7,000 that you pay to each employee as wages during the year. Additionally, he says, some states waive this tax as well.
Insuring Your Health
Hiring a spouse can also lead to health-insurance savings. In states that don't allow "group of one" plans, sole proprietors with a spouse on the payroll can sometimes qualify for small group insurance policies. Group policies, which provide group rates, tend to be cheaper than individual policies. For more on this, click here .
Mike Hanrahan, a tax accountant in Anchorage, Alaska, who advises small businesses, adds that you're also able to write off the full cost of coverage as a business expense rather than an adjustment to income, which is currently how sole proprietors whose spouses don't work for them write off their medical coverage. Deducting the cost of health insurance for these business owners simply reduces their income tax only. Business owners who, instead, deduct health-care premiums as a business expense also are shielded from having to pay the 15.3% self-employment tax on those funds. However, Hanrahan notes that entrepreneurs only save 15.3% if they earn $102,000 or less. Otherwise, he says, "you only get the 2.9% [Medicare tax] savings."
Health Cost Savings
Business owners who hire their spouses also can establish health reimbursement accounts, open to any business with at least one employee, says Gene Fairbrother, lead business consultant for the National Association for the Self-Employed in Dallas. Like health savings accounts, HRAs offer a tax-advantaged way to pay for out-of-pocket medical expenses such as eyeglasses and prescription drugs, which typically aren't covered by insurance.
However, unlike HSAs, contributions to HRAs, which are limited to an employee's income level, can fund health-care premiums. (HSA funds can be used toward premiums too but only upon retirement.) Additionally, individuals don't have to own high-deductible health-care policies, which can cost $1,800 to $2,500 a year, according to Fairbrother. Reimbursement payments made to employees for qualifying expenses aren't taxable. And sole proprietors are able to deduct those payments as business expenses.
Social Security History
Another benefit to hiring a spouse who, for example, wasn't already working is that he or she can establish a Social Security history. To do so, says Caplan, the Foster City accountant, "you have to be on the payroll." According to the U.S. Social Security Administration, to receive benefits an individual must earn a certain number of credits, which in 2008 are worth $1,050 each. While the number of required credits differs depending on a person's age and type of benefit, individuals can earn a maximum of four credits each year. This means that a person's total annual income could potentially need to reach roughly $34,000 to trigger a $4,200 Social Security tax. Keep in mind that most people need to earn about 40 credits to qualify for retirement benefits. Caplan adds that with two spouses paying into the system, "you could end up with more net Social Security [benefits] at retirement rather than a single wage earner."
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