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Old 07-10-2001, 10:54 PM
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Lawn-Scapes Lawn-Scapes is offline
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Join Date: May 2001
Location: Maryland
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Tax Tip - Hire Spouse

Just wanted to share this piece of info I found...

You could also hire your spouse. Whether you think you could work with your better half is, of course, a question only you can answer. But here's something to consider — your husband or wife could enable you to greatly increase your health benefits, even if he or she just works part-time.

If you're a sole proprietor (again, which means you run a business that isn't legally classified as a corporation or a partnership) then you probably already know that you usually can't deduct 100% of your health- and dental-insurance premiums. Instead, you're limited to writing off only 60%. And, unfortunately, that 60% deduction doesn't count as an expense in computing your self-employment tax.

Out-of-pocket medical costs (deductibles, co-payments and uninsured expenses) are even worse. You can't deduct a cent, unless they exceed 7.5% of your adjusted gross income (as is the case with most taxpayers). Even if they do, you only get to write off the excess. No great shakes.

This all changes, however, for married folks who work together. You can beat the system by hiring your spouse as an employee of your proprietorship and then installing a medical-expense reimbursement plan for your new "employee." By doing so, you'll be able to cover items not covered by insurance (deductibles, co-pays, etc), tax-free.

Here's how it works. The reimbursement plan — which must be detailed in writing — covers uninsured medical costs for your employee-spouse and his or her family members (which, obviously, includes you). The plan document should define uninsured medical costs to include your family's medical- and dental-insurance premiums, deductibles, co-payments, prescriptions and any uninsured medical, dental and vision-care expenses.

So what does this arrangement do for you from a tax perspective? Lots of good things. First, the reimbursements received by your employee-spouse are free of any federal income or payroll taxes (they qualify as a tax-free fringe benefit). Plus you can deduct 100% of the reimbursements as employee compensation expenses on Schedule C. Bottom line? You're now able to write off 100% of your family's health- and dental-insurance premiums plus all your out-of-pocket medical costs, too. Taking the write-off (on Schedule C) also gives you a double tax break because it reduces both your income taxes and your self-employment tax.

For this deal to pass muster with the IRS, your spouse should receive some cash wages during the year, as befits his or her status as a bona fide employee. Cash wages are, of course, subject to Social Security and Medicare taxes, which for the year 2000 amount to 15.3% on the first $76,200 ($80,400 for 2001). But you can finesse this issue by making the cash wages a relatively small part of your employee-spouse's total compensation package. Most of his or her compensation can be in the form of the medical reimbursement plan fringe benefit.

Here's an example. Say your husband's part-time efforts for your sole proprietorship business during the year are worth about $8,000. His reimbursements for family medical costs total $7,000 (say $4,500 for insurance premiums and $2,500 for uninsured medical and dental expenses). You should pay $1,000 to your husband as cash wages. That way, his total compensation will equal the aforementioned $8,000. The $1,000 of wages will trigger $153 in Social Security and Medicare taxes (15.3% of $1,000). Of course, the wages are taxable income on your joint return. This, however, is offset by the compensation deduction you'll claim on your Schedule C. As you can see, $153 is a small price to pay for writing off $7,000 worth of family medical costs, vs. only $2,700 (60% of the $4,500 of insurance premiums).
Anyone do this?

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