Hiring your spouse to work as an employee in your business can save you big on taxes. The savings can be particularly great if you are a sole proprietor or have a single-member LLC taxed as a sole proprietorship or as a partnership (as long as your spouse is not a partner).

But this arrangement can backfire if you don’t do it the right way. Here are five key things to know about employing your spouse.

1. Pay Your Spouse Tax-Free Employee Benefits, Not Taxable Wages

You’ll realize no tax savings if you put your spouse on the payroll and pay him or her cash wages.

Employee wages you pay your spouse are fully taxable. Your spouse-employee must pay federal and state income tax on wages. And you and your spouse must each pay half of the Social Security and Medicare tax on wages. As your spouse’s employer, you must withhold these taxes and pay them to the IRS.

In effect, when you pay your spouse wages, you’re simply moving the income from one place on your tax return to another.

Instead of wages, you should pay your spouse entirely, or mostly, with tax-free employee fringe benefits. Certain types of employee benefits, such as health insurance, are not taxable income for your spouse-employee, yet they are a deductible expense for you as your ... Log in to view full article.