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TAX ISSUES DURING A DIVORCE

        Placing Your Spouse On The Payroll         

If you own a small business and have a spouse who does not have full-time employment elsewhere, you may want to consider placing him or her on your company payroll.  (Keep in mind that your spouse must do legitimate work for the company and the compensation for that work can be challenged by the IRS if it is considered unreasonable). 

 

The advantages of having your spouse work for your business are numerous and can often offset the additional FICA taxes the company will have to pay on his or her salary.  A few examples of the potential savings are as follows:

 

The advantages of having your spouse work for your business are numerous...

Business Travel

If you take numerous business trips with your spouse, you may be able to deduct the full cost of the trip provided you can establish a business reason for your spouse's presence.   If your spouse is not an employee, establishing that business reason would be virtually impossible.

Pension Plan

If your salary is currently in excess of the maximums allowed under your company's qualified retirement plan (see our Federal Tax Database for current limitations), you may be able to shift some of your salary to your spouse in order to increase your combined retirement contributions.

Health Insurance

If your business is operated as a sole proprietorship with no employees, you may currently only deduct a portion of your personal health insurance premiums.  By adding your spouse as an employee, you could establish a health plan covering all employees which would then become a legitimate, fully-deductible business expense.  Your spouse could be covered under a family plan which would include you and any other dependents. 

Double Taxation

If your business operates as a C corporation and you have concerns that the IRS may consider your compensation unreasonable, hiring your spouse or other dependents can give you a means of taking profits out of the business without having to pay taxable dividends on earnings already taxed at the corporate level.

As we stated above, the IRS can indeed challenge the employment of your spouse if they consider it a sham just to avoid taxes.  We can certainly assist you if you feel that employing your spouse is an option you would like to consider.

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