“ The work must be real, pay must be reasonable, and the IRS must see your spouse as an actual employee,” says Megan Slatter at Crewe Advisors in Salt Lake City. In other words, you can’ t just do this as a tax move. But done correctly, she says, such hires“ can lead to business deductions, retirement savings advantages and even health insurance perks.”

For one thing, business owners can offer their workers tax-advantaged benefits in lieu of taxable wages— including health insurance that’ s deductible to the business yet doesn’ t constitute taxable income for a couple. Hiring a spouse can also beef up future Social Security earnings for a couple or for the surviving spouse.

The other tax-advantaged fringe benefits for a business can include the ability to deduct life insurance premiums and education expenses related to the business.

It also means considering the type of entity clients’ own, says Miklos Ringbauer, founder of MiklosCPA in Los Angeles and secretary / treasurer of the California Society of CPAs. For example, rules to deduct medical insurance premiums on a spouse’ s W-2 as a pretax item can differ depending on whether the entity is an S corp or a multi-member LLC, Ringbauer says.

Slatter notes,“ If you’ re a sole proprietor and your spouse is your only employee, you can avoid federal unemployment tax and possibly even FICA tax in some instances. Having a spouse on payroll can also double 401( k) contributions since each spouse can max out their salary deferrals and receive

employer contributions, basically doubling tax-advantaged savings.”

However, having a spouse on your team doesn’ t mean you can avoid labor laws.

“ Hiring [ your ] spouse is no different [ than ] hiring a traditional employee when it comes to employment laws and regulations,” Ringbauer says.“ When the taxpayer has enough money or the business has grown sufficiently to add the owner’ s spouse to the payroll, it is best to discuss tax and other consequences with a tax advisor. This is

“ The IRS loves to challenge family employment arrangements, so keeping good records is critical.”

— Megan Slatter

especially important as state laws may differ from federal when it comes to benefits.”

“ The IRS loves to challenge family employment arrangements, so keeping good records... is critical,” Slatter says.“ This includes actual work performed, pay stubs and performance reviews.”

According to CPA David Silversmith in New York, many people put their spouses on the payroll because they can defer more of the income of the couple’ s household to a retirement account and save on taxes.“ It also means more Social Security income in retirement and other tax benefits,” says Silversmith, who is also a manager for private client services at Eisner Advisory Group in New York.

However, he adds:“ Hiring a spouse can be a red flag for an IRS audit.”

“ I’ d tell the client to only hire the spouse if the spouse is actually going to do work,” Silversmith says.“ If the spouse does do work, keep a log of it. The spouse should not be a co-owner of the business.” He says the business owner should make sure the spouse gets paid, and also“ that the compensation is reasonable and that the spouse doesn’ t

make any management decisions that would normally be made by an owner.”

“ The most tax-efficient way to hire a spouse and to avoid an audit would be to put a spouse on payroll,” he says. One can also hire a spouse as an independent contractor, he says, but the IRS has rules for those claiming that designation, including a test to determine how much control they have over their own work.

“ Putting the spouse on payroll helps prove that the owner, not the spouse, makes the management decisions,” Silversmith says.

— Jeff Stimpson

APRIL 2025 | FINANCIAL ADVISOR MAGAZINE | 7