Should You Employ Your Spouse?

This is definitely a loaded question but today we are just going to look at it from a tax point of view because ’tis the tax season and an optical practice is an ideal business for husband and wife e.g. optician and optometrist, office manager or book-keeper and optometrist or any combination of ECP’s and optical staff.

Husband and Wife Team - Bob and Claire Thomas-Carter owners of Thomas Carter Opticians

Many sole proprietors benefit from family members assisting with their business, especially in the start-up phase or helping out a few hours a week and this the kind of situation where it is more likely you could be losing tax benefits and the question “Should you employ your spouse?” needs to be asked. While these services are often uncompensated, tax-saving opportunities are available if a formal compensation arrangement is created. However, for wages paid to a spouse to provide tax advantages, the overall compensation arrangement for a  spouse must be reasonable. When measuring reasonable compensation, both direct wages and nontaxable fringe benefits must be considered. Employing a child in a sole proprietorship can also be an effective method in reducing the overall family tax burden. These are some things to take into consideration:

  • Deduction of annual health insurance premiums for income tax purposes – as a self-employed individual, a proprietor can deduct annual health insurance premiums for income tax purposes. However, a self-employment tax benefit is also available. By creating a formal employee relationship with a spouse and paying the medical insurance premiums and other medical costs of the spouse (and family members, including the proprietor) as a tax-free fringe benefit, 100% of the cost is deductible.
  • Social security disability benefits and survivor benefits
  • Increased funding to a qualified retirement plan

However, each situation is unique so please take professional tax advice.

Source: Alert January 2011

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