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Tax expert Murray Bradford reveals the substantial tax benefits that can be achieved by employing spouses within a business. In a recent article titled “Five Things to Know About Employing a Spouse” published in the July issue of the Tax Reduction Letter, Bradford highlights essential considerations for employers who wish to leverage this strategy effectively and maximize tax savings. The article can be accessed at https://bradfordtaxinstitute.com/mbpr/?SendTo=/Content_qwerty/Five-Things-to-Know-About-Employing-Your-Spouse-23.aspx.

Employing a spouse as an employee has the potential to yield significant tax advantages, particularly for sole proprietors and single-member LLCs operating as sole proprietorships or partnerships (excluding spouse-partners). However, it is crucial to navigate this arrangement carefully to avoid potential pitfalls. Bradford emphasizes the following key insights:

Tax-Free Employee Benefits: Employers should prioritize providing tax-free fringe benefits to their spouse-employees instead of cash wages. While wages paid to a spouse-employee are fully taxable, paying a spouse with benefits such as health insurance are deductible business expenses for the employer and non-taxable income for the spouse.

Establish a Medical Reimbursement Arrangement: Employers with a spouse as their sole employee can create a 105-HRA plan, which allows for the conversion of health insurance premiums and medical expenses into fully deductible business expenses. This results in reduced taxable income for both income taxes and Social Security and Medicare taxes.

Other Fringe Benefits: Employers can explore using additional tax-free fringe benefits for their spouse-employees as payment, including job-related education, group term life insurance coverage, working condition fringe benefits, and de minimis fringe benefits.

Limitations and Considerations: Employers should be aware of certain limitations and considerations associated with tax-free benefits, such as Section 127 education plans and transportation benefits, which may have restrictions or limited tax advantages.

Establishing Bona Fide Employment: To ensure the legitimacy of the employer-spouse relationship from the IRS’s perspective, employers must demonstrate that their spouse is a bona fide employee. Factors include performing genuine work, receiving reasonable compensation, working under the employer’s direction and control, and maintaining clear separation of business assets and ownership.

By carefully implementing these strategies, employers can unlock substantial tax savings while complying with applicable regulations.

For a comprehensive analysis and detailed guidance on employing spouses for tax reduction purposes, please refer to the full article “Five Things to Know About Employing a Spouse” at https://bradfordtaxinstitute.com/mbpr/?SendTo=/Content_qwerty/Five-Things-to-Know-About-Employing-Your-Spouse-23.aspx.

About Murray Bradford, CPA

Murray Bradford, CPA, is a tax expert with extensive experience in devising and implementing strategies to minimize taxes for small businesses. As the publisher of the monthly Tax Reduction Letter at bradfordtaxinstitute.com/Welcome.aspx/mbpr, Bradford shares his expertise with a wide audience. Through his website, the Bradford Tax Institute, tax professionals and business owners can access a wealth of valuable resources, including an archive of over 1,500 articles containing tax-saving strategies.

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Company Name: Bradford Tax Institute
Contact Person: W. Murray Bradford, CPA
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Phone: (415) 446-4340
Country: United States
Website: https://bradfordtaxinstitute.com/