Tax incentives for employing a spouse
A common approach used by many business owners is to hire their spouse as an official employee. Hiring your spouse as an official employee can have some disadvantages; however, there are least six tax benefits you can receive from taking this approach.
The following tax benefits may be applicable to you:
1. Retirement plan contributions deduction in the full amount. Within generous limits and if all tax law requirements have been met, contributions made on behalf of your spouse can be deducted by the company.
2. Taking a salary. If you are operating a C Corporation, any wages you pay to your spouse would have stayed with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you will save tax overall if your spouse draws a salary.
3. “Back to school” advantages. Education expenses acquired to improve an employee’s job skills are deductible by the company and tax-free to the employee. Therefore, your company can plan to send your spouse “back to school” on either a part-time or a full-time basis.
4. Travel expenses. In general, you cannot deduct the travel expenses attributable to your spouse if he or she accompanies you on a business trip. On the other hand, if your spouse is an authenticated company employee and is going for a valid business reason, his or her travel costs — including airfare, lodging and 50% of meal expenses — may be deducted.
5. Health insurance coverage. If you are currently paying more to cover your spouse under your company health insurance plan, hiring your spouse shifts the expense to your company. Typically, your company can deduct the full cost of the health insurance paid for your spouse, just as it can for other employees.
6. Other benefits. Similar to health insurance, your spouse is entitled to the same group-term life insurance coverage as other employees in the company. The first $50,000 of employer-paid group-term coverage is tax-free to an employee.
In addition, depending on your form of business, you may also be entitled to new tax breaks for hiring a spouse under the Hiring Incentives for Restoring Employment (HIRE) Act. Hiring your spouse may have other tax-related implications, which is why you should always consult a tax specialist. Seeking advice from a tax accountant professional, like Emil Estafanous, CPA can minimize your taxes. For additional details, please contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at 562-868-6333 and his accounting staff will be glad to discuss the particulars of your situation and your no-cost, no-obligation Free Consultation.
Dependent Health Coverage
Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010.
The Internal Revenue Service announced today that these changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
“These changes give employers a unique opportunity to offer a worthwhile benefit to their employees,” IRS Commissioner Doug Shulman said. “We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees.”
This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
The notice says that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described applies to that extended coverage.
