Should My Husband Be on Payroll for Our Business?
Explore the considerations and implications of adding your husband to your business payroll, including tax and compliance factors.
Deciding whether to include your husband on the payroll of your business carries significant financial and legal implications. This decision involves navigating tax regulations, classification rules, and documentation requirements.
Employee Classification for a Spouse
Classifying your husband as an employee requires understanding the IRS guidelines, which help determine whether a spouse should be an employee or an independent contractor. This classification affects tax obligations and benefits eligibility. Unlike an independent contractor, an employee requires payroll tax withholding.
The IRS uses “common law rules” to assess control and independence. These rules evaluate behavioral control, financial control, and the nature of the relationship. If your husband works under your business’s control regarding tasks and execution, he is likely an employee, requiring compliance with Social Security and Medicare tax obligations.
Classifying a spouse as an employee may also impact access to benefits like health insurance and retirement plans. Misclassification can lead to audits, fines, and penalties, so ensure compliance with IRS guidelines.
Wages and Payroll Tax Withholding
Setting wages for your husband involves meeting payroll tax withholding obligations. Employers must withhold federal income tax, Social Security tax (6.2% on wages up to $160,200 for 2024), and Medicare tax (1.45% on all wages, with an additional 0.9% for earnings over $200,000). These funds must be deposited with the IRS on a semi-weekly or monthly schedule, depending on tax liability.
State and local taxes may also apply, depending on your business’s location. For example, California requires withholding state income tax and disability insurance contributions, while New York mandates state income tax and metropolitan commuter transportation mobility tax in certain areas.
Reporting Requirements for Spousal Employment
Adding your husband to your business payroll requires accurate reporting. The IRS mandates filing specific forms, including Form W-2, which details total earnings and taxes withheld. Errors in these forms can lead to complications with the IRS.
Employers must also file Form 941, reporting income taxes, Social Security, and Medicare taxes withheld, and Form 940, which covers unemployment taxes. The FUTA tax rate for 2024 is 6.0% on the first $7,000 of wages, with a potential credit of up to 5.4% for timely state unemployment tax payments, reducing the effective rate to 0.6%.
State-specific reporting requirements also apply. For instance, California businesses must file the DE 9 quarterly report, summarizing wages and taxes withheld. Timely and accurate filing is essential to avoid penalties.
Potential Impact on Tax Filing
Employing your husband can affect personal and business tax filings. Income shifting may reduce overall tax liability if your husband falls into a lower tax bracket. Additionally, this arrangement can maximize retirement contributions, lowering taxable income.
However, these benefits come with added complexities. Both personal and business tax returns must accurately reflect his income and withholding taxes. Expenses related to his employment should be properly deducted. His income will also appear on your joint personal tax return, potentially affecting eligibility for certain credits or deductions.
Housekeeping for Employment Documentation
Maintaining proper documentation is critical when employing your husband. Accurate records protect your business during audits or disputes. The IRS and Department of Labor require specific employment records, and noncompliance can result in penalties.
Ensure your husband completes Form W-4 to determine federal income tax withholding. Update this form as financial circumstances change. Retain Form I-9 to verify work authorization for either three years after hire or one year after employment ends, whichever is later.
State laws may require additional documentation, such as new hire reporting to comply with child support enforcement laws. Maintain payroll records, including pay stubs and benefits payments, to demonstrate compliance with wage and hour laws and substantiate tax deductions.
Noncompliance Consequences
Failure to comply with rules for spousal employment can result in significant financial and legal consequences. Common issues include misclassification, inadequate documentation, and tax reporting errors, which may trigger audits, penalties, and interest charges.
Misclassifying a spouse as an independent contractor can lead to assessments of back taxes for unpaid payroll taxes, including Social Security and Medicare contributions. Penalties for failing to withhold and deposit payroll taxes range from 2% to 15% of the unpaid amount, depending on how late the payment is. Intentional misclassification can result in harsher penalties, including criminal charges under the Internal Revenue Code.
Noncompliance with wage and hour laws may lead to lawsuits, back pay awards, and damages. Under the Fair Labor Standards Act, violators may be required to pay double the amount of unpaid wages as liquidated damages.