I’ve written before that it’s generally not a good idea to hire your spouse to do work for your family child care business. The reason is that you must withhold and pay Social Security taxes on the wages and your spouse must report the money as income.
You may also have to purchase workers’ compensation insurance.
Therefore, there is little, if any tax advantage to doing so.
There is one big exception to this general rule.
If your family has more than $1,000 of annual uninsured medical expenses then you may want to hire your spouse and set up a medical reimbursement plan. This is also know as a Health Reimbursement Arrangement (HSA).
A medical reimbursement plan (also known as a Section 105 plan) allows you to deduct your family’s uninsured medical expenses as a business deduction. This can potentially save you thousands of dollars in taxes each year.
Medical expenses can include: premiums on health insurance, diagnostic fees, examination fees, hospital bills, orthodontia, braces, hearing aids, wheelchairs, eyeglasses, contact lenses, etc. Virtually any medical expense that you could have deducted as an itemized expense on Schedule A can be claimed under this plan.
Here’s how it works: You hire your spouse to do work for your business. The work must be directly related to the business (record keeping, playing with the children, repairing toys, cleaning up after the children, etc.). Do not count activities that are personal in nature (household chores such as mowing the lawn, taking out the garbage, etc.).
Treat your spouse as your employee. This means keeping proper records of what work was done and when, and getting an employer identification number (EIN). If you pay your spouse you must file the proper federal and state payroll tax forms.
But you do not have to pay your spouse a wage! This means you can avoid paying an federal or state payroll taxes or purchasing workers’ compensation insurance. I won a US Tax Court case for a family child care provider on this point.
Hire a company to set up a medical reimbursement plan. To find such a company, ask your tax professional or Google “Section 105 plan”. Your plan will cover your spouse/employee and his family’s uninsured medical expenses. That means you and your own children as well!
Here’s an example of the tax benefit of such a plan. If your uninsured medical expenses for the year are $5,000 and your family’s adjusted gross income was more than $74,9010 and less than $151,200 (2015 tax brackets) you would save about $2,000 in federal taxes ($5,000 x 40% tax rate [25% income tax rate plus 15% Social Security tax rate]). That’s a big tax savings!
If you set up this plan you may have to offer a similar plan to your employees. If your husband has a pre-tax medical spending account at work your plan’s tax benefits will be smaller. If you hire your own children under age 18 the plan will only cover their uninsured medical expenses, not yours.
The largest company offering HRA plans to family child care providers is TASC. Their plan is called BizPlan. See my article, “How You Can Deduct Family Medical Expenses.”
Check out a medical reimbursement plan. It may be right for you!
Tom Copeland – www.tomcopelandblog.com
Image credit: wbfn.org
For more information see my book Family Child Care Record Keeping Guide.
Tom Copeland, www.tomcopelandblog.com