IC Emergency Physician - Can I Employ Wife for Business-related Work?

[southerndoc]

I'm an independent contractor emergency physician who also serves as a medical director for several EMS/fire departments. The medical direction/consulting work requires that I send invoices, sign controlled substance forms/scan them in, mail them, etc.

My wife currently is a stay-at-home mother. Can I employ her to do day-to-day activities and allow her to contribute to my Solo 401(k)? Will I need to officially employ her (i.e., W-9, pay payroll taxes, etc.) or can she take part of the "profit" of my business.

I am not currently incorporated.

[jfoxcpacfp]

Of course you can...but does it make economic sense? This question is on my fairly long list of blog posts I intend to write when (if) I ever get caught up and start writing newsletters again.

Yes, you will need to employ her. But that’s not the most significant concern (although it is something to consider). Here’s the more important consideration, impo:
When you pay your otherwise non-working spouse, you are trading income taxed at your Medicare rate of 2.9% (because I’m assuming you are earning more than the SS limit of $137,700 for 2020) for a FICA tax of 15.3% simply in order to contribute to a solo-k on her behalf. Put bluntly, if I came to you with a proposal to manage her solo-k for a front load of 12.4%, what would you say? (I hope I know the answer.)

• Yes, you’ll get a deduction, but you will also eventually pay tax on those contributions + all growth at your top marginal tax rate. And be subject to RMD’s.
• My preference would be a taxable account for your spouse in this situation. If she already had a day job earning at least $137,700, my opinion would definitely be impacted.

At least, this is how I explain it to financial planning and CPA clients. If I am missing something significant, folks, please jump in!

[Cubicle]

jfoxcpacfp said it perfectly. But I also want to add it state taxes. As an independent contractor in NJ, I don't have to contribute to state unemployment / family leave / etc... Employing a spouse would require that.

Plus payroll processing, filling quarterlies, etc...

[southerndoc]

What you say makes sense. She won't have a lot for social security benefits, but it's my understanding she can draw 50% of my earnings when she retires.

Maybe I'll stick with a spousal IRA -> backdoor Roth and her getting half of my social security benefits when we both retire.

[Miracle Max]

Is the benefit of deducting the spouse's salary upfront being underestimated? If salary is set so that a 401k gets maxed out, that is a significant income tax savings. When the 401k is distributed in retirement taxes will be paid, but hopefully at a lower bracket. Some sample numbers from 2019 assuming a 37% marginal bracket:

Salary of $20,573, $19,000 of which into 401k.
$1573 employee (spouse) FICA, $1573 employer (S-corp) FICA, though employer portion can be deducted saving $582. Total cost of $2,564. My S-corp would still be having to pay for unemployment, payroll, etc. so not much extra cost there.

Since total salary goes to 401k, one saves $7,030 on income taxes up front. If you don't employ spouse, you pay the income tax plus 2.9% of $20,573 ($597) which you would have distributed.

I figure on a yearly basis you "pay" about $2,000 to save $7,000 in income taxes, invest another $19,000 in 401k, and add more social security for spouse. Also some states don't tax retirement distributions so a little savings there.

Still don't know if it is worth it in the end though, but we've done it for several years. Might just be kicking the tax can down the road and have considered stopping.