Reduce your taxes by hiring your spouse

Hiring your spouse can result in significant tax savings. This is especially true if you are a sole proprietor or have a single-member LLC since these entities enable the business owner to deduct the family medical expenditures.

To reduce your taxes, you must pay your spouse with as many tax-free benefits as possible. Paying tax-free wages is deductible for the business but not taxable income for the spouse. You will receive no tax savings from paying your spouse with cash wages. Doing this would only be moving income from one place on your return to another.

Generally, health benefits are the most significant tax-free employee fringe benefit you can provide your spouse. The IRS has no limit on how much you can reimburse your spouse for medical expenses. Still, the total should be reasonable for the amount of work performed.

Medical reimbursements are tax-free to employees but are tax-deductible to you as the employer. In addition to reducing your income tax, deducting health expenditures reduces your Social Security and Medicare taxes.

Business owners are often concerned about how much they must pay their spouses in cash wages. The IRS has allowed businesses to deduct medical reimbursement benefits paid to their spouse without payment of any cash wages.

In most states, minimum wage laws don't apply if a sole proprietor hires their spouse as an employee. However, your spouse must receive reasonable benefits for their work.

Tax professionals commonly recommend paying a spouse a nominal fee, such as $100 monthly. They often believe giving a W-2 creates additional credibility that the spouse is legitimately employed. However, if your spouse isn't a legitimate employee, paying nominal wages won't help.

Your spouse should purchase his or her own health insurance plan in their name to cover the entire family.

As the employer, you must reimburse your spouse for the premiums. You should also reimburse your spouse for health expenses not covered by insurance. The deductible health expenses include deductibles, copays, and prescriptions for your entire family.

You and your spouse should sign a formal plan document, and your spouse should provide receipts for all reimbursed expenses.

You can convert health insurance premiums and other medical expenses for your spouse, yourself, and your children under age 27 by adopting the right type of plan. Setting up a 105-HRA plan enables you to deduct your family's medical expenditures as a business expense if you have no other employees than your spouse.

Hiring your spouse can reduce your taxes by thousands of dollars without incurring additional expenses.