Tax Help Blog

Tax blog posts, news, videos and more from our team of experts!
Ask a Tax Expert

Tax Deductions and Hiring Your Spouse

May 25, 2010

Q: I attended the TaxTalk seminar in Casper, WY, in March. You mentioned some tax perks to hiring your spouse. Can you explain that to me?


A: The key benefit to hiring your spouse is related to the benefits of a Health Reimbursement Arrangement used to maximize the pre-tax payment of medical expenses. For about the last 25 years, the IRS has allowed small businesses to adopt Heath Reimbursement Accounts for their employees as authorized under Internal Revenue Code Section 105. The NASE HRA 105 plan is such a plan, thus the name 105. These Plans allow for your business to pay for things like insurance premiums, dental care, eye care, prescription drugs, etc, on behalf of your employees. The costs are deductible to your business but are not taxable income to the employee. This is the same concept that big businesses use in Section 125 plans (cafeteria plans) and Medical Spending Accounts (MSA’s). The small-business owner who currently has no employees but does have a spouse that helps in the business achieves the biggest benefit. The owner hires their spouse and adopts an HRA Plan that covers all of the family’s medical costs. Because of the adopted Plan, all of the family’s medical costs are now 100% deductible, instead of only the health insurance premiums.

If you normally have out of pocket costs of about $400 per month, for example (health insurance premiums alone can be that high) your tax savings could be $2,000 or higher. So, if you spent $400 per month or $4,800 per year and are in the 28% tax bracket, you will save 28% in federal taxes or $1,344 and 15.3% in self-employment taxes or $734 for a total of $2,078. Remember that you save not only on federal taxes but also on your self-employment taxes and on state taxes, if your state has a state tax. Your state tax rate could save you another 3% to 5%. Also, don’t forget that this $4,800 is money that you are going to spend whether you have a plan or not, so the $2,000 savings is totally a result of the plan. The benefit is only available to employees; therefore, the small-business owner operating as a sole proprietorship will not be able to deduct their own expenses, but only those of their employees. This is why they would need to hire their spouse as an employee in order to take advantage of the plan.

The practical process for the expense is that the employee pays the qualified expenses personally and then submits a request for reimbursement. This is similar to submitting an expense reimbursement request at work for business items that you may have paid for. The business then issues a check to the employee to reimburse them for the expense. The expense is now a deduction for the company and is supported by the request for reimbursement. The amount would be included on line 14, Employee Benefit Programs on the Schedule C, Profit or Loss from Business.

Another key point is that neither the IRS nor the Department of Labor has an annual filing requirement. Larger companies file an annual form 5500 for their benefit plans, which can be complicated. HRAs have no such filing requirement. The IRS, however, does require that the plan be in writing and be nondiscriminatory. You can log read more about the free plan the NASE offers here.

NASE Social Media

res-footer-facebook res-footer-twitter res-footer-linkedin

res-footer-blog res-footer-huffpost res-footer-youtube

Related News...

How To Qualify For Social Security Disability Benefits If You Are Self-Employed
If you are self-employed, you own your own business or you do gig work or freelance. You pay in taxes, but you do not have an employer who makes deductions from your paychecks. If you are self-employed and you are disabled because of a medical condition, you may qualify for disability benefits from the Social Security Administration (SSA). This is a rundown of how you can qualify for disability benefits if you are self-employed.
Posted on Dec 16, 2020
Ask the Expert - Added Expenses on Extended Tax Return
Question: I extended my tax return that is now due on October 15th. I just discovered that I left off some expenses from the previous year that I should have included. Can I include those amounts on this tax return or on next year’s tax return, or have I lost the benefit of those expenses?
Posted on Sep 13, 2019
Tax Preparation for the Small Business Owner
At The National Association for the Self-Employed, we know that tax season can be a hassle for independent contractors, freelancers, and small business owners. You don’t usually have the resources to hire seasoned accountants, so you end up taking precious time out of your busy day to do it yourself. But never fear, NASE is here to guide you and your small business through the process with the essential knowledge you’ll need to navigate your 2018 Tax Year.
Posted on Feb 25, 2019
Want to see more news items?  Click here  

Related Videos...

Are Quarterly Estimated Tax Payments Really Needed?
Find out more about quarterly estimated tax payments. How much should my quarterly payment be and what happens if I do not make payments? What are a 3 safe harbors to help you avoid penalties? Always remember, do not pay in more taxes than you have to.
Posted on Jan 10, 2018 by Katie Vlietstra
How to Deduct the Business Use of Your Vehicle
Will you be prepared at the end of the year to take your vehicle tax deduction? Are you keeping a mileage log in case of audit?
Posted on Jan 10, 2018
Self Employment Tax
As a self-employed business owner, you are the employee and the company. Make sure that self-employment tax is part of your business plan.
Posted on Jan 10, 2018
Want to see more related videos?  Click here  

Still Have Questions?

Ask The Expert

Courtesy of