Can I Hire My Spouse as an Employee?

Hiring your spouse to work in your business is a recognized strategy that can offer operational and financial advantages. This arrangement involves formally employing your spouse, which requires adherence to specific labor and tax regulations. When structured correctly, it allows a business owner to expand their workforce with a trusted individual while potentially accessing certain tax efficiencies.

Establishing a Legitimate Employment Relationship

For the arrangement to be recognized, the spouse must be a “bona fide employee.” This means the work they perform must be ordinary and necessary for the business. The duties should be clearly defined, and the compensation paid must be reasonable for the services rendered, aligning with what you would pay a non-related person for similar work. Keeping detailed records of hours worked and tasks performed is a standard practice to substantiate the employment relationship.

The business structure is a primary factor in defining the employment relationship. In a sole proprietorship, the business owner is the direct employer of their spouse. This creates a straightforward employer-employee dynamic.

When the business is structured as a corporation or a partnership, the legal distinction is important. In these cases, the business entity itself is the employer, not the owner individually. This means the employment relationship is with the legal entity, which has its own set of rules and tax obligations that differ from those of a sole proprietorship.

Payroll Tax Implications

Once a legitimate employment relationship is established, specific payroll tax obligations come into play. Regardless of the business structure, wages paid to a spouse are subject to federal income tax withholding based on their Form W-4. The employer is responsible for remitting these withheld funds to the IRS.

Wages paid to a spouse are also subject to Social Security and Medicare taxes, collectively known as FICA taxes. This applies to all business structures. The business must withhold the employee’s share of these taxes and pay the corresponding employer’s share.

The treatment of Federal Unemployment Tax Act (FUTA) taxes, however, depends on the business entity. For a sole proprietor hiring their spouse, wages are exempt from FUTA tax. This exemption does not apply if the business is a corporation or a partnership, which must pay FUTA taxes on the spouse’s wages up to the federal wage base limit.

Integrating Your Spouse into Benefit Plans

Bringing a spouse onto the payroll as a legitimate employee opens pathways to include them in company benefit plans. One of the most common areas for this is health insurance. A business can deduct 100% of the health insurance premiums it pays on behalf of its employees, including an employee-spouse. This allows the business to cover the family’s health insurance costs as a deductible business expense.

The establishment of earned income for the spouse also makes them eligible to participate in the business’s retirement plan. If the business offers a plan like a SEP IRA, SIMPLE IRA, or a Solo 401(k), the employee-spouse can contribute to their own retirement account. This creates an opportunity to significantly increase the family’s total retirement savings on a tax-deferred basis. The business may also make employer contributions to the spouse’s account.

Required Hiring Paperwork and Information

Before processing the first paycheck, a business owner must complete essential hiring paperwork. The first step is often to obtain a Federal Employer Identification Number (EIN) from the IRS if the business does not already have one. An EIN is required for any business that pays wages to employees and is used to identify the business entity on all payroll tax filings.

The owner must have the employee-spouse complete and sign Form I-9, Employment Eligibility Verification. This form, mandated by U.S. Citizenship and Immigration Services, verifies the employee’s identity and authorization to work in the United States. The employer must examine original documents presented by the spouse and record the information on the form.

Additionally, the spouse must complete a Form W-4, Employee’s Withholding Certificate. This form tells the employer how much federal income tax to withhold from the employee’s pay. The spouse will fill out their filing status, number of dependents, and any other adjustments. A written employment agreement is also a recommended practice to reinforce the legitimacy of the employment relationship.

Implementing the Payroll Process

With the preliminary paperwork completed, the next step is to execute the payroll process. This begins with calculating the spouse’s gross pay for the pay period based on the agreed-upon salary or hourly rate and hours worked. From this gross pay, the employer must subtract the necessary tax withholdings for federal income tax, determined by the spouse’s Form W-4.

The calculation must also include FICA tax withholdings. This involves deducting 6.2% for Social Security on wages up to the 2025 wage base limit of $176,100 and 1.45% for Medicare, which has no wage limit. The business is then responsible for matching these amounts, regardless of the business structure.

After calculating the net pay and issuing a paycheck, the employer must deposit the withheld taxes with the federal government. These deposits are typically made electronically through the Electronic Federal Tax Payment System (EFTPS). The frequency of these deposits—either monthly or semi-weekly—depends on the total tax liability of the business. This process can be managed using dedicated payroll software or by engaging a professional payroll service.