Starting a Proprietorship: Can I Hire My Wife and Set Her Salary?

I am starting a proprietorship firm. Can I employ my wife? She is currently not working anywhere, but she is qualified and perfect for the position in my new company. Will there be any limitations on how much salary I can hire her for? Also, is it possible for her to work from home instead of actually coming to the office? Please advise.

You are the proprietor of your firm. You can appoint your wife in that organization in any suitable position. Whatever question you asked, the answer will be available in the offer of employment and appointment order issued to her.

Employing Your Wife in Your Firm

You can employ your wife in your firm in any suitable position you feel fits. The salary can be decided by you as well. Will you have any other employees in a similar position to the one you plan for your wife? There is no limit on the salary you can pay. If the firm can afford it, you can pay, but remember that other employees will be observing the work of your wife. Whether she works from home will depend on the type of work done by your firm. One must be clear about the reason for employing your wife before making a decision.

I must, however, add to the above post of mine by clarifying that you cannot breach certain fundamental norms in your efforts to minimize your tax outgo.

Legitimacy of Expenses

First, the expenses should be legitimate. A salary without limit may get questioned by an IT officer under Section 40A(2) of the IT Act. Keep this aspect in mind while fixing the salary.

Fair Market Value

Payments made should not be excessive or unreasonable compared to the fair market value of the services in connection with the legitimate needs of the business. That is why I asked, are you planning to employ someone else in a position similar to your wife? Pay the salary by cheque, and if your wife falls in the IT bracket, she has to file IT returns.

Conclusion

In conclusion, while it is a good idea to pay your wife and reduce tax outgo, be reasonable and judicious in the amounts being paid as salary, etc.

@Nathrao, I basically want to draw some amount for myself as a salary, but it is not possible. So, I think it would be better if I get it in my wife's name. On paper, she is well-qualified and deserves the salary based on her qualifications. So, from that point of view, it will be okay. Even if my employees know about this, she will be working from home. I believe working from home is allowed, even if an employee works 100% from home.

Please provide your feedback or correct me if I am wrong anywhere, as I am at the starting point. If there are too many issues, I may not be able to employ her and simply show everything as profit. However, this will surely increase taxation significantly.

Understanding Sole Proprietorship and Employing Family Members

The sole proprietorship is the oldest, simplest, and most ubiquitous form of business entity. It is a business owned by a single person. For all tax and legal liability purposes, the owner and the business are one and the same entity. The income earned through operations can be taken by the proprietor's pocket or reinvested as he/she sees fit and proper.

Employing your wife and paying her a salary can be shown as a business expense. However, as mentioned above, your wife may have a tax liability. Personally, I feel your wife should come to the office and work for some time at least. Your payment to your wife should be seen as reasonable expenses for business activity. There is no problem employing your wife. However, do take your tax consultant's view on the subject also.

Regards

Employing a Spouse in Your Proprietorship Firm

Having one's own wife or husband as an employee is not new in India for various legal reasons at their own discretion. What I gather from your post is that this idea is engaging you in planning your tax implications. Whether your option would help you in achieving your purpose will depend on the quantum of your firm's profit and the so-called 'salary payout' to the spouse. Prima facie, there is no harm in implementing your idea. But since you have not provided the figures, I could not think of better ideas. As already pointed out by Mr. Nath Rao, a hefty/unreasonable 'salary payout' may pose problems at the time of the assessment of your income tax.

In the circumstances, it may be wise to discuss with your auditors and seek their advice, which is practical and would take care of future issues as well.