Hire spouse for PLLC?

[childay]

In this case I am the spouse.  My wife is also a physician with an LLC.  I am paid on W2 basis.  Am considering hiring myself via her LLC.  Unlike in WCI post about similar situation (Here), I am already maxing out payroll taxes for both of us. I also already max the 18k employee contribution at my W2 job.

My main question is how to determine a reasonable compensation.  I do end up spending a fair amount of time doing bookeeping, administrative stuff etc for her LLC but hard for me to value that.  The main benefit would be for the 20% employer solo 401k contribution which I am not sure is worth the trouble..

[jfoxcpacfp]

What do you mean by "I am already maxing out payroll taxes for both of us"?

You will not pay any extra Medicare taxes but you will have to be paid via payroll as a W2 employee and file those danged payroll tax forms. (But that would mean you'd be paid more for doing the payroll!!!)

If your wife's plan allows for after-tax 401k contributions, it could be very worthwhile to be on the plan. Is your top priority getting money in a 401k or trying to save taxes?

As for reasonable compensation...what exactly are your duties and how much time do you spend doing them? This might be better for a private conversation or one you should have with your CPA. You should set a salary, not an hourly rate, imo.

[litovskyassetmanagement]

jfoxcpacfp wrote:

What do you mean by “I am already maxing out payroll taxes for both of us”?

You will not pay any extra Medicare taxes but you will have to be paid via payroll as a W2 employee and file those danged payroll tax forms. (But that would mean you’d be paid more for doing the payroll!!!)

If your wife’s plan allows for after-tax 401k contributions, it could be very worthwhile to be on the plan. Is your top priority getting money in a 401k or trying to save taxes?

As for reasonable compensation…what exactly are your duties and how much time do you spend doing them? This might be better for a private conversation or one you should have with your CPA. You should set a salary, not an hourly rate, imo.

Click to expand...

I think OP was talking about employee portion.  So the only way this arrangement makes sense tax-wise if tax savings from the 401k plan contribution more than makes up for the payroll taxes (the employer portion or 7.65%) which the PLLC owner will pay to keep OP on the payroll. Also, it is 25% 401k contribution, not 20% if you get a W2.  So I think this arrangement makes sense.  Your salary can be anything as long as you can justify this to the IRS (so a formal job description might be warranted).

Also, you can have the best plan in the world if you have full control over your plan document and your investments (which you do if you have your own plan), so you might consider only doing the match at your main place of employment, and contribute the rest into your PLLC 401k plan.  With the right plan document you can also do after-tax contributions, which is a really neat way to contribute up to $53k into the plan (you need to have at least $53k in earnings).

Looking at the big picture, if PLLC owner gets a 1099 then they would be the primary beneficiary of the 401k plan as they could contribute $53k for themselves.  If at some point the PLLC owner would want to contribute significantly more than $53k, they can add a Cash Balance plan, and the spouse can also get a CB contribution on their behalf into the plan, so that's another significant 'multiplier' as far as tax savings. However, if the PLLC has employees (and the PLLC owner has more than 80% ownership), this arrangement will not work for controlled group reasons.  So you have to be very careful.

[Slav4ikMD]

As I am also considering doing this, if it's ok I'll jump in with a question:  I am thinking of hiring my wife for the private practice side of what I do, as she is already helping me with a lot of administrative stuff essentially as a "volunteer" and it would be nice to help us further maximize pre-tax retirement savings (she currently does not work, mostly home with the kids).  My business is now structured as a PLLC / solo proprietor.  I can hire an employee as a solo proprietor, correct?  If I paid her a salary of say 30k a year, with a goal of her putting away as much as possible into a 401k, in general would an arrangement like that be worthwhile, or it would become a wash?  Do you think it can still be done for this year or best to start clean in 2017?  (I will obviously discuss with my accountant, just brainstorming.)

 

 

[jfoxcpacfp]

Slav4ikMD wrote:

As I am also considering doing this, if it’s ok I’ll jump in with a question:  I am thinking of hiring my wife for the private practice side of what I do, as she is already helping me with a lot of administrative stuff essentially as a “volunteer” and it would be nice to help us further maximize pre-tax retirement savings (she currently does not work, mostly home with the kids).  My business is now structured as a PLLC / solo proprietor.  I can hire an employee as a solo proprietor, correct?  If I paid her a salary of say 30k a year, with a goal of her putting away as much as possible into a 401k, in general would an arrangement like that be worthwhile, or it would become a wash?  Do you think it can still be done for this year or best to start clean in 2017?  (I will obviously discuss with my accountant, just brainstorming.)

Click to expand...

Yes, you can do it this year and I recommend doing so if you decide to pull the trigger (see below).

Yes, you can hire employees in a SMPLLC.

No, it would not be a wash. You would shelter a chunk of taxable income at your top marginal tax bracket in your wife's SOLO-k. However, you would be paying full FICA tax on your spouse rather than simply Medicare tax on our income. You'll still come out ahead, but on the minus side, you'll have costs for payroll administration and the tax effect of the full FICA you'll pay on your wife's payroll (15.3% less 1/2 as an above the line deduction) less the Medicare you'll pay on your net profits (2.9% less 1/2 as an above the line deduction). You will also have unemployment taxes on her pay. So, yes, you should talk this over with your CPA to figure out the net benefit.