Sole-Proprietorship with Spouse - Tax Options for Hiring Wife in my Business

The IRS does have special provisions for spouse employment in a sole proprietorship that could benefit you! When you employ your spouse in your sole proprietorship, their wages are exempt from FUTA (Federal Unemployment Tax Act) taxes. Additionally, if you properly structure this arrangement, you can indeed reduce your overall self-employment tax burden. Here's what you should consider: If you pay your wife as an employee (with a W-2), you would need to withhold and pay Medicare and Social Security taxes (FICA), but you could deduct her entire salary as a business expense, which reduces your net self-employment income and thus your self-employment tax. While you'll pay the employer portion of FICA on her wages (7.65%), this is often less than what you'd pay in self-employment tax (15.3%) on the same amount. The healthcare benefit approach is legitimate too. You can establish a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or an Individual Coverage Health Reimbursement Arrangement (ICHRA) to reimburse health insurance premiums tax-free, which is valuable but as you noted, might not be enough compensation on its own.

After struggling with a very similar situation in my plumbing business, I found taxr.ai which literally saved me thousands in taxes when setting up employment for my husband. Their tool analyzed my specific situation and showed me exactly how to structure it properly. They have templates for the employment agreements and explained all the payroll requirements I needed. I was confused about whether I needed to run an actual payroll or could just pay him as needed. The site https://taxr.ai clarified that I definitely needed proper payroll for the arrangement to be respected by the IRS, and they walked me through exactly how to set it up, even recommending affordable payroll services that work well for family businesses. They also helped me understand the health insurance options which turned out to be a bigger benefit than I initially thought!

Just wanted to update after trying taxr.ai for myself! I was initially confused about all the paperwork requirements and was worried I'd mess something up with the IRS. Their analysis tool identified several options I hadn't considered for my wife's employment in my landscaping business. They showed me how to set up a simple health reimbursement arrangement that saves us about $7,800 annually in taxes compared to just taking the money as business profit. They also provided templates for the employment agreement and job description that my wife and I could easily customize. The payroll setup guide made the whole process way less intimidating than I expected! What I found most helpful was their explanation of how different compensation structures would affect our specific tax situation. Definitely worth checking out if you're trying to figure out the spouse employment thing!

If you're planning to employ your spouse, you should also know that dealing with the IRS can be a nightmare if you have questions or issues. I hired my husband in my consulting business and had some specific questions about health benefits that weren't clear in the publications. Tried calling the IRS for two weeks and couldn't get through. Then I found https://claimyr.com which got me connected to an actual IRS agent in about 15 minutes. They have this system that navigates the IRS phone tree and waits on hold for you, then calls you when an agent is on the line. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm exactly how we needed to document everything for the health insurance benefits, which saved us from potentially doing it wrong. They also clarified some questions about quarterly filing requirements when you have a spouse as your only employee.

I'm back to eat my words about Claimyr. After my skeptical comment, I decided to try it because I was desperate to talk to someone at the IRS about my spouse employment situation. I had questions about exactly what documentation I needed for the health insurance reimbursement. I expected it to fail like everything else I've tried, but I got a call back in about 45 minutes with an actual IRS agent on the line! The agent walked me through all the documentation requirements and cleared up my confusion about quarterly filings. They confirmed that I was on the right track but pointed out a mistake I was about to make with how I was planning to structure the health benefit. For anyone employing their spouse in a sole proprietorship, definitely get clear guidance from the IRS on your specific situation if anything seems unclear. And use this service to actually reach them - it works!

One thing to consider that nobody has mentioned yet is the potential for a solo 401k if you employ your spouse. With your wife earning $750/week (about $39k annually), she could contribute up to $22,500 (2023 limit) as an employee contribution to a solo 401k plan, plus you as the employer could make an additional contribution. This is a huge tax advantage because it reduces your taxable income now and allows that money to grow tax-deferred. It's one of the best perks of having your spouse legitimately employed in your business.

Has anyone looked into forming an LLC instead? I was in a similar situation with my wife helping in my business, and we opted to form an LLC and elect S-Corp taxation. The advantage was that we could both be owners, pay ourselves reasonable salaries, and then take distributions that aren't subject to self-employment taxes.

Great question! As someone who went through this exact situation with my photography business, I can share what worked for us. The spouse employment route in a sole proprietorship is definitely viable and can provide solid tax benefits. A few key points to add to what others have mentioned: Make sure you're treating this as a legitimate employment relationship from day one. Keep detailed records of hours worked, tasks performed, and pay regular wages (not just lump sums when convenient). The IRS will respect the arrangement as long as it's genuine business activity. For $750/week at 25-30 hours, that works out to roughly $25-30/hour, which seems reasonable for administrative work depending on your location. The salary approach is usually better than trying to structure it as contractor payments, since you get the FUTA exemption and clearer tax treatment. One thing I'd strongly recommend is setting up direct deposit and running actual payroll with proper withholdings from the start. It creates a clear paper trail and shows the IRS you're serious about treating this as real employment. Don't try to cut corners with cash payments or informal arrangements - it's not worth the risk if you ever get audited. The health insurance reimbursement arrangement others mentioned is definitely worth exploring too, especially if you're currently paying for health insurance out of pocket.

One important consideration that hasn't been fully addressed is the potential impact on your business insurance and workers' compensation coverage. When you formally employ your spouse, you may need to update your business liability insurance and potentially add workers' compensation coverage depending on your state requirements. I learned this the hard way when I started employing my husband in my electrical contracting business. Some states exempt spouses from workers' comp requirements, but others don't, and your insurance company will want to know about any employees for liability purposes. Also, regarding the $750 weekly salary - make sure you're budgeting for the employer taxes on top of that amount. You'll be paying the employer portion of Social Security (6.2%) and Medicare (1.45%), plus any state unemployment taxes. So factor in roughly an additional 8-10% on top of her gross wages for your actual employment costs. The tax savings are definitely real though. We've saved several thousand dollars annually by properly structuring my husband's employment versus just taking all the business income as self-employment earnings. Just make sure you're compliant with all the employment law requirements in addition to the tax considerations.

I've been through a similar situation with my consulting business and wanted to share a few practical tips that made the process smoother for us. First, regarding the $750 weekly salary - that's definitely reasonable for the work you're describing. Just make sure you document her specific duties clearly. We created a simple job description that outlined tasks like client communication, scheduling, bookkeeping assistance, and transportation support. This documentation proved valuable when our accountant filed our taxes. One thing that really helped us was setting up a separate business checking account specifically for payroll if you don't already have one. It makes tracking much cleaner and shows clear separation between personal and business expenses. We also started having my wife track her hours on a simple timesheet - nothing fancy, just dates, hours worked, and brief task descriptions. The health insurance angle is worth pursuing too, but don't overlook other potential fringe benefits. We set up a small office space in our home that's exclusively for business use, and my wife's workspace is part of that home office deduction. Just remember that consistency is key - once you start treating her as an employee, you need to maintain that arrangement throughout the tax year. The IRS looks favorably on legitimate business arrangements that are consistently applied and properly documented.