How Much Can I Pay My Wife to Work for Me?
Learn how to fairly compensate your wife for working in your business while complying with tax and payroll regulations.
Hiring your spouse to work for your business can offer financial and tax advantages, but their salary must comply with labor laws and IRS regulations to avoid penalties. Assigning an arbitrary wage without justification could attract scrutiny from tax authorities.
To ensure compliance, determine fair compensation, handle payroll taxes correctly, and maintain proper records.
Classification as an Employee
When hiring your spouse, determine whether they qualify as an employee rather than an independent contractor or business partner. The IRS assesses classification based on the level of control the business has over the worker. If your spouse follows a set schedule, performs regular duties under your direction, and uses company-provided resources, they are considered an employee.
Misclassification can lead to penalties, back taxes, and interest. If the IRS determines your spouse was incorrectly treated as an independent contractor, you could be responsible for unpaid payroll taxes, including Social Security and Medicare contributions. Employment classification also affects workers’ compensation and unemployment insurance. Most states require businesses to carry workers’ compensation coverage for employees, including spouses, unless specific exemptions apply. Unemployment insurance contributions may also be necessary, depending on state laws.
Determining a Fair Wage
The IRS requires that wages paid to family members be “ordinary and necessary” for the business and comparable to what an unrelated employee would earn for similar work. Paying an inflated salary to maximize tax benefits could lead to reclassification of wages as non-deductible distributions.
To establish a reasonable salary, research industry standards for similar positions. The Bureau of Labor Statistics (BLS), Glassdoor, and Payscale provide wage data across occupations and locations. If your spouse handles bookkeeping, administrative duties, or customer service, their pay should reflect market rates for those roles in your region.
Compensation should also be sustainable based on revenue, profit margins, and cash flow. An inflated salary could create financial strain or raise concerns about improper income shifting. A reasonable approach is to calculate wages as a percentage of revenue or net income, ensuring the business remains solvent while justifying the expense.
Withholding and Payroll Taxes
Once your spouse is classified as an employee and receives a reasonable wage, payroll tax obligations must be met. Federal income tax withholding is required unless they claim an exemption on Form W-4. Employers use IRS Publication 15-T to calculate the correct withholding based on earnings and tax bracket.
Social Security and Medicare taxes (FICA) must also be deducted. In 2024, Social Security tax is 6.2% on wages up to $168,600, while Medicare tax is 1.45% with no income cap. Wages exceeding $200,000 incur an additional 0.9% Medicare surtax. Employers must match these contributions, effectively doubling the amount remitted to the IRS. Deposits must be made monthly or semi-weekly, depending on total payroll tax liability, with late payments incurring penalties.
State payroll taxes vary but often include unemployment insurance (SUTA) and, in some states, disability insurance or additional local levies. Employers must register with state agencies, file quarterly reports, and remit payments according to state deadlines. Noncompliance can result in fines and interest charges.
Pay Frequency and Recordkeeping
Establishing a consistent payroll schedule ensures compliance with labor laws and simplifies financial management. Federal law does not mandate specific pay periods, but most states require at least semi-monthly or biweekly payments. Failing to meet these requirements could lead to penalties or wage claims. Choosing a schedule that aligns with business cash flow while meeting legal obligations helps prevent payroll disruptions.
Accurate recordkeeping is essential. The Fair Labor Standards Act (FLSA) requires employers to maintain payroll records for at least three years, including hours worked, pay rates, and deductions. Tax authorities require employment tax records—such as Forms W-4, W-2, and 941—to be retained for at least four years. Inadequate documentation can complicate audits or result in penalties. Using payroll software or hiring a payroll service can help ensure accuracy and compliance.
Social Security and Medicare Considerations
Paying your spouse as an employee means both of you contribute to Social Security and Medicare through payroll taxes, which can impact future benefits. These contributions help build their work history, potentially increasing their Social Security retirement or disability benefits. Unlike sole proprietors who must pay self-employment tax, hiring a spouse as an employee allows the business to split the tax burden between employer and employee.
A reasonable wage ensures your spouse qualifies for Social Security benefits based on their own earnings record. To be eligible for retirement benefits, a worker must earn at least 40 credits, with a maximum of four credits per year. In 2024, one credit is earned for every $1,730 in wages, meaning an employee must earn at least $6,920 annually to receive the full four credits. If your spouse lacks sufficient work history, employment in your business can help them qualify for benefits independently. Additionally, Medicare eligibility at age 65 requires at least 10 years of work history, making consistent earnings an important factor in securing future healthcare coverage.