Should You Hire Your Spouse? (And Will the IRS Thank You or Audit You?)
Be sure to read until the end for a trivia question!
Step one: make sure they actually want the job.
Few tax questions sound as deceptively appealing as: “Should I just hire my spouse?”
At first glance, the idea seems clever. The work stays in the household, the money stays in the household — surely the tax benefits follow, too… right?
As with most clever ideas in tax planning, the answer is: sometimes, rarely, and only under the right circumstances. Hiring your spouse can be worthwhile, but it can also result in higher taxes, unnecessary payroll complexity, and zero net benefit.
Let’s walk through when this strategy makes sense, when it doesn’t, and what you should consider before adding your spouse to payroll.
1. When Hiring Your Spouse Might Actually Make Sense
This strategy only works when:
You have real administrative work that you would otherwise pay someone else to perform,
Your spouse is qualified and willing, and
You pay a reasonable, market-based wage and complete proper onboarding (W-4, I-9, timesheets, documentation, etc.).
If your spouse isn't doing meaningful work — or if the compensation is arbitrary — the IRS will not be impressed. This is a commonly challenged arrangement in small business audits.
In short: you must treat your spouse as an actual employee, not a tax concept.
2. Why Income Shifting Doesn’t Work for Married Couples
Hiring an employee creates a deduction for your business. The employee receives taxable income.
This strategy works beautifully when the employee is in a lower tax bracket than the employer — such as hiring your children or another low-income family member. The business owner gets a large deduction; the child or relative pays little or no tax. Win–win.
But with spouses? Not quite.
When spouses file a joint tax return, shifting income from your business income to your spouse’s W-2 wages does not reduce household taxable income. You are simply rearranging money on the same Form 1040.
There is no income tax savings from this alone.
3. The Payroll Tax Cost
Hiring your spouse means paying:
Employer Social Security and Medicare
Employee Social Security and Medicare
Federal unemployment tax (FUTA)
Possibly state unemployment or other payroll taxes
Total payroll tax impact is roughly 15% of wages, depending on your state.
This alone often outweighs any potential tax benefit.
4. The Primary Reason to Consider Hiring Your Spouse: Retirement Contributions
Despite the challenges above, hiring your spouse can unlock valuable retirement planning strategies.
If the bulk of your spouse’s earnings are contributed into a tax-deferred or Roth retirement account, the benefits may outweigh the payroll tax cost.
For 2026:
Your spouse can contribute up to $24,500 as an employee deferral to your 401(k) plan, provided they are eligible under the same rules as your other employees.
This is one of the few cases where hiring a spouse begins to make sense.
Important note:
Your spouse does not need earned income to contribute to an IRA or Roth IRA if you file jointly. A spousal IRA already provides that option without hiring them.
5. Why Hiring a Spouse Who Already Has a 401(k) Rarely Works
If your spouse already has a job and has maxed out their 401(k) employee deferral, the value of hiring them decreases significantly.
Here’s why:
Employer 401(k) contributions are limited to 25% of compensation.
Your combined federal/state marginal tax rate is likely less than 50%. The tax savings from deductible 401k contributions are 25% of this, at most.
Payroll taxes on your spouse’s wages will run roughly 15%.
In many cases, the payroll taxes exceed the tax benefits. And remember: deductible 401(k) contributions are tax deferrals, not tax eliminators. You’ll eventually pay tax on those contributions — ideally at a lower rate, but still taxed.
6. A Special Case: Unlocking the Child and Dependent Care Credit
If your spouse currently has no earned income, but you pay for child care, hiring them can allow your household to claim the Child and Dependent Care Credit.
The credit is available for:
Up to $3,000 of qualifying expenses for one child
Up to $6,000 for two or more
At higher incomes, the credit rate is typically 20%, meaning up to a $1,200 benefit.
However:
The credit is limited to the earned income of the lower-earning spouse.
If your spouse does not work, you may be blocked from receiving it.
Hiring your spouse can provide the needed earned income.
There are exceptions: full-time students and individuals who are disabled (per IRS definition) also qualify for a deemed amount of earned income.
7. Will Hiring Your Spouse Increase Their Future Social Security Benefits?
Possibly — but not always in meaningful ways.
The Social Security tax system is straightforward: you pay in based on wages.
The benefit system is not straightforward at all.
Two key considerations:
A. Spousal benefits often render additional earnings irrelevant.
If your spouse’s calculated benefit is less than half of your full retirement benefit, they will likely file for a spousal benefit instead — meaning their own earnings record doesn’t matter.
B. If your spouse’s future benefit could exceed half of yours, then additional earnings may increase household Social Security income.
But this typically applies only when the spouse has meaningful outside career earnings.
If the work is limited to part-time administrative tasks in your business, the impact on future Social Security benefits may be minimal.
In most marriages, Social Security outcomes do not justify hiring a spouse.
TaxSmart Takeaway
Hiring your spouse probably isn't worth it unless they have the time, inclination, and legitimate work they are qualified to perform.
Because spouses file a joint tax return, hiring your spouse is not an effective income-shifting strategy.
Additional payroll taxes significantly reduce the potential benefit.
The real advantages arise when hiring your spouse creates meaningful eligibility for retirement contributions or the Child and Dependent Care Credit.
Hiring your children or other low-income earning relatives is often a more efficient, straightforward tax strategy.
Special Trivia Question:
What is unique about hiring your spouse, compared to other employees?
A. You don’t have to withhold Social Security or Medicare taxes
B. You can keep your Solo 401k plan
C. You can opt out of paying federal unemployment tax (FUTA) if you are unincorporated
D. It doesn’t matter whether they are legally eligible to work in the United States
E. B and C
F. All of the above
Click here for the answer!