Here are some excellent tax- related reasons to consider placing
your spouse on the company payroll:
Medical Insurance
If your business is operated through a sole proprietorship, putting
your spouse on the payroll will allow you to fully deduct health
insurance premiums. You can accomplish this by setting up a health
insurance plan for all employees (e.g., your spouse). The cost
of the medical insurance is a tax deduction for the business.
Generally self-employed can only deduct 60% of medical insurance
premiums but putting your spouse on the payroll increases this
deduction 100%.
Business Trips
If you take business trips, you are not allowed to deduct your
spouse's expenses, no matter how vital or important he or she
is to the success of the trip, unless your spouse is a bona fide
employee of your business.
Avoid Double Tax
If you do business through a C (regular) corporation, paying a
salary to a spouse allows you to take earnings out of the corporation
without paying a double tax. For example, if money is taken out
of a C corporation via a dividend, a tax is paid on the original
earnings by the C corporation and a second tax is paid by the
shareholder when the dividend is received. Whereas, money taken
out of a C corporation as salary is taxed only once - to the wage
earner.
Social Security
If your spouse isn't currently working or is not earning the social
security maximum, collecting a salary from your business will
increase his or her future social security benefits.
Increased Pensions
Generally, only the first $170,000 (indexed for inflation) of
salary can be taken into account when computing allowable contributions
to most qualified retirement plans. If your salary is more than
that, putting your spouse on the payroll and shifting some of
your salary, in excess of $170,000, to your spouse will increase
your combined retirement contributions.
Childcare Deduction
Putting your spouse on the payroll will make you eligible to claim
a credit for expenses incurred for child care. The size of the
credit depends on two things: how much you pay for childcare and
your Adjusted Gross Income. The maximum allowable credit for two
or more children is $960.
CAUTION
If you put your spouse on the payroll, you have to pay payroll
taxes on the additional salary. Payment of the payroll taxes will
offset some of the benefits gained by putting your spouse on the
payroll. Furthermore, your spouse must perform legitimate work
for the business.
