Spouse Employee

[Aviator]

I have a client who is a sole proprietor of a retail business (not a LLC) who employs between 6 - 8 common law employees. The client wants to add her spouse to the payroll as a bone fide employee. As far as I can determine now the client's spouse has no connection with the business whatsoever so it does not appear the situation meets the criteria as a husband and wife business; a partnership; or a qualified joint venture. The client owns and manages the entire operation. Both client and spouse live in a non-community property state. I recognize that adding the spouse to the payroll will alter the SE tax of the client. The income earned by the spouse of course will be reported on a Form W-2 (to include federal taxes and FICA witholdings), and this income will be included on their MFJ federal tax return. My main concern however is that since both parties are signatories to their annual tax return, they both benefit from a refund or conversely, are both or individually responsible to pay any balance due. The client-owned sole proprietorship could play a key role in the final outcome.

Aside from the client SE issue mentioned above it looks as though this spouse employment arrangement would be acceptable. Am I missing any important points here?

I would sure welcome and appreciate any thoughts or advice offered from contributors to this board.

Thank you.

Aviator

[oceanlovin'ea]

Employee

Spouse can be an employee of the business of the wife. BUT he must have something to do for the company. She cannot just have him on the payroll to shift some income from her.
He could do janitorial duties, ordering for her, pricing mdse, some kind of office duties, whatever. But he has to do work for being paid. She should be paying him a resonable salary and keep a time sheet and records of what he is doing.

What are common law employees? Are you referring to people she pays as self employed people. She really needs to be careful. If she tells them when to work and what to do, they are employees and she needs to be treating them like employees and withholding payroll taxes and reporting that as payroll.

Linda

[Aviator]

Spouse Employee

Thank you, Linda for your reply. One of the strengths of a message board such as this one is that tax issues can be "bounced" off other tax return preparers who have the expertise to offer sound advice. I felt reasonably comfortable with the situation I described in my original post but it is always good to get another opinion, or for that matter a source that will put you on the right track. At your suggestion I will reiterate to the client that if her spouse is hired he must perform meaningful work for the business and not just put on the payroll to create additional expenses.

Regarding your question about a common law employee. This is a person whose duties are controlled by the employer and who does not have the freedom of action to perform services for the business such as that given to a independent contractor (i. e., a W-2 employee). In the business I described earlier, no independent contractors are used in the employee role.

Thank you again.

Aviator

[Lion]

Benefits

The employer can offer benefits to employees, including the spouse: health insurance premiums, a flexible spending account, a retirement plan, etc. The employee spouse can have health insurance for his spouse (owner) and family.

[gkaiseril]

What are common law employees? Are you referring to people she pays as self employed people. She really needs to be careful. If she tells them when to work and what to do, they are employees and she needs to be treating them like employees and withholding payroll taxes and reporting that as payroll.

Linda

A common law employee is a person working for an entity that is considered as an employee under the common law, case law. Of course one can have a written contract with each employee.

[oceanlovin'ea]

I just never heard the term before. So I was curious. Thanks for clearing it up for me.

Linda