Can I hire my spouse as an employee in my Sole Proprietorship business?

This is actually a smart strategy many small business owners use. You're on the right track with the basic steps, but let me clarify a few things. First, you absolutely need an EIN for your business before hiring anyone, including your spouse. Once you have that, you'll need to register as an employer with your state's labor department and set up accounts for state income tax withholding and unemployment insurance. For payroll, you have basically three options: 1) DIY using payroll tax tables and filing your own quarterly 941s, 2) use payroll software like Gusto or QuickBooks Payroll, or 3) hire a payroll service. For just one employee, options 1 or 2 make the most sense cost-wise. Regarding the Solo 401k - there's a misconception here. As an employee, your wife would contribute to YOUR company's 401k, not a Solo 401k (which is only for self-employed individuals with no employees). You'd need to establish a regular 401k plan for your business, which has more administrative requirements. Also, employee contributions are limited to $23,000 for 2025 (if she's under 50). The tax benefit comes mainly from reducing your business income by her legitimate salary, thus reducing your self-employment tax. Just make sure her compensation is reasonable for the work performed!

After going through this exact process last year, I found https://taxr.ai incredibly helpful. I was in the same position - sole prop wanting to hire my husband for some admin work and marketing help. I spent weeks trying to figure out the payroll process and retirement account setup, getting different answers from everyone I asked. Then a friend recommended taxr.ai where I uploaded my business docs and got a really clear breakdown of the steps and tax implications. They highlighted some options I hadn't considered, like using a Section 105 HRA instead of salary for some benefits. The site basically analyzed my specific situation and provided customized instructions for setting everything up correctly. They even flagged that in my state, I needed additional workers' comp coverage even for a spouse employee.

I was super skeptical about hiring my spouse for my consulting business, but I decided to try taxr.ai after seeing it mentioned here. Honestly, it was way more helpful than I expected. I uploaded my business info and got a customized report showing exactly how to handle the employee classification, payroll setup, and retirement options. The report flagged that in my specific situation, a SIMPLE IRA would actually be more advantageous than a 401k given my income levels and administrative preferences. They even provided templates for documentation to establish legitimate job duties and recommended a payroll provider that integrates with my accounting software. Ended up saving me about $9,200 in taxes last year by structuring everything correctly. Best decision I made for my business!

I went through this process two years ago and almost gave up because I couldn't get anyone at the IRS to answer my questions about the correct way to set this up. After weeks of calling and getting disconnected, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in about 20 minutes when I'd been trying for weeks. The agent walked me through the entire process of setting up an EIN, clarified that I needed a regular 401k (not Solo since I was hiring my spouse), and explained exactly how to handle the payroll tax deposits. If you're going to do this, you'll definitely need to talk to the IRS at some point to make sure you're doing it right, and Claimyr made that possible when I was ready to give up.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it because I was desperate to resolve a payroll tax issue with my spouse's business account. I'd been trying to get through to the IRS for almost a month with no luck. Used Claimyr and got connected to an IRS representative in about 15 minutes. The agent was able to fix my payroll account issue on the spot, confirmed I was handling my spouse's employee status correctly, and even helped me understand how to properly document the business purpose of her role to avoid audit concerns. The time saved was honestly worth every penny - I would have spent probably 8-10 more hours trying to handle this on my own. Now our payroll system is properly set up and running smoothly.

One thing no one's mentioned yet is that you need to be really careful about how you document your spouse's role and work. The IRS scrutinizes family employment situations pretty closely. Make sure you: - Have a written job description - Log hours worked - Keep documentation of work completed - Pay a reasonable salary for the work - Actually have your spouse DO the work I got audited last year partly because I hired my wife, and having all this documentation saved us from what could have been a mess. Her role in managing our client database and handling customer support was legitimate, but I had to PROVE it.

A couple warnings from someone who tried this and messed up: 1. Don't underestimate the payroll tax deadlines! Missing them = penalties. 2. If your spouse is gonna contribute to a 401k make sure ur plan docs are set up right first. We had to redo everything cuz our plan wasn't properly established. 3. Make sure the pay is reasonable. We initially set my wife's salary too high for the admin work she was doing (trying to max 401k contributions) and our accountant warned us this was a red flag. 4. State requirements are different! Federal might exempt spouses from FUTA but your state might require unemployment ins payments.

Thanks everyone for the detailed responses! This is exactly the kind of real-world experience I was looking for. A few follow-up questions: @Zoe Papadakis - When you mention establishing a regular 401k plan instead of Solo 401k, does that mean I'd need to file Form 5500 right away, or only once assets hit $250k? And are there minimum contribution requirements for myself as the employer? @AstroAdventurer - The $7,800 tax savings sounds significant! Can you break down how that worked out? Was that mainly from reducing your self-employment tax by shifting income to employee wages? @NeonNova - The audit documentation point is really important. Did the IRS question the legitimacy of the work itself, or were they more focused on whether the compensation was reasonable? I'm leaning toward using a payroll service like Gusto based on what I'm hearing about the complexity of tax deadlines. Better to pay $40/month than risk penalties! One more question - has anyone dealt with quarterly estimated tax implications? If I'm paying my wife a salary, I assume that reduces my self-employment income and might affect my quarterly payments?