When running a small family-based business having the right insurance plan can be a source of great benefits in terms of health coverage. This is especially important for the “spouse employee” situation.
What is spouse-employee insurance?
From the insurance point of view, a spouse-employee is the worker of a business who is a spouse to the business owner but is not an owner themselves or a professional specialist. A spouse-employee cannot be classified as an “independent contractor” as well. Speaking simply, the spouse of the business owner should work as a simple employee with no formal power to influence the profits or the decision-making process within the business.
There are a lot of elements that the IRS takes into account when qualifying a business owner’s spouse as an employee. For instance, if the spouse hare a share of more than 2% in a sub-chapter S corporation then they are classified as a business owner even if they work at the enterprise as an employee.
What’s the point?
There are certain benefits of having employee-spouse insurance:
1. The cost of covering accidents and health is deductible by the business owner if there’s such insurance option provided to his or her spouse.
2. The costs of coverage and medical bills are not included into the gross income of the spouse-employee.
In most cases, health and accident coverage the business owner gets as an employee of his own business is still subject to taxation as it is regarded as income. However, we all know that the business owner and his or her spouse-employee live in the same household and usually have the same family budget. So, if the spouse is hired as an ordinary employee the business owner can cut insurance costs and the premiums paid are not regarded as income. As a result, the spouse-employee gets health insurance free of charge. Sure, it’s the business insurance policy that pays the premiums, but it’s not included in their family budget. So if the business owner hires his spouse or any other family members as legal employees, they can benefit from virtually free health and accident insurance that the business pays for them.
Besides, the wages paid to spouse or any other family members as employees are considered as business expenses as well. And in most cases the wages the spouse receives are also used in the household. That’s why small family-bases businesses are considered to be so beneficial from the taxation point of view. Not to mention that business insurance provides additional coverage for the entire family.
Are there any catches?
It all depends on the state you set up your business in and its form, so it sure pays to consult with your tax advisor first. And don’t forget that IRS will require the business owner to provide proof that the spouse is actually performing their work instead of being a taxation shelter for the business. This is done to prevent fraud and tax speculations.
However, the biggest catch is the fact that the business owner should provide this form of business insurance benefits to all employees, not just their spouse or family members. Otherwise, it could be classified as discrimination and cause penalties from IRS.