Hiring spouse

[Ronason]

I would like to hire my spouse for my side income 1099 job which brings in 200-250K annually. Assuming the job responsibilities are legitimate, I would like to increase the tax deferral space in a solo 401K. I have one set up at vanguard for this job and was able to max out my 53K limit for 2016.

Does my wife need to set up her own solo 401K? I am new at this and have gone through multiple threads but it has remained unclear. Does she need a W2? I assume yes and, if so, how do I arrange that? CPA? DIY with software? At one point I read there was a sweet spot in terms of salary somewhere in the $20,000's. Can someone explain that rationale to me? Thanks in advance.

[Sajimone]

Its been awhile since I've set this up.. I had help..  but very similar situation.   My wife is an employee to me and I set her up as one under my vanguard 401k.   I pay her roughly about 21.6k to cover her full 18k employee contribution plus payroll taxes.   So far, I file the 940 annually, 941 quarterly along with payments, and FL state reemployment taxes.   Quarterly I contribute about $4500 ($1500/month) into the vanguard solo 401k employee side.   Regarding employer contribution to my wife.. it didn't make a lot of sense for me to contribute as a employer under her name as my side deal is 125-150k and net profit would only split the employer portion between us.  But I believe if higher net profit.. you may be able to contribute a lot more into the employer side between you and your wife?   I think this will be an interesting thread... look forward to hearing other folks experiences!

[jfoxcpacfp]

Ronason wrote:

I would like to hire my spouse for my side income 1099 job which brings in 200-250K annually. Assuming the job responsibilities are legitimate, I would like to increase the tax deferral space in a solo 401K. I have one set up at vanguard for this job and was able to max out my 53K limit for 2016.

Does my wife need to set up her own solo 401K? I am new at this and have gone through multiple threads but it has remained unclear. Does she need a W2? I assume yes and, if so, how do I arrange that? CPA? DIY with software? At one point I read there was a sweet spot in terms of salary somewhere in the $20,000’s. Can someone explain that rationale to me? Thanks in advance.

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1. You will set up a SOLO-k for your business.


2. You will hire your wife at a fair rate of compensation and she will set up her own account through the business's SOLO-k.


3. You will document the duties your wife performs to demonstrate that she is actually performing the work required to receive the wages paid.
   
   
   
   • There is no "sweet spot" - it truly depends on an arms' length negotiation. Your threshold as a business owner is that your expenses should be necessary and reasonable.
   
   
   
   


4. Yes, you need a CPA. Payroll is really not a good activity for DIY. Please trust me on this. Work an extra shift and pay for a professional.

Something you need to be aware of if your wife does not already work is that you will be paying full FICA (15.3%) on her wages plus unemployment when you are paying only Medicare taxes on your income (2.9%) and have almost surely already maxed out of UI. This doesn't kill the deal, but is an expense that you should take into consideration.

[Zaphod]

Currently considering the same. I do not have an LLC as Im in California and its very spendy for little benefit. Would it be better to form an LLC before employing someone else?

[jfoxcpacfp]

Zaphod wrote:

Currently considering the same. I do not have an LLC as Im in California and its very spendy for little benefit. Would it be better to form an LLC before employing someone else?

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nope, won't matter.

[ShahMD]

"Something you need to be aware of if your wife does not already work is that you will be paying full FICA (15.3%) on her wages plus unemployment when you are paying only Medicare taxes on your income (2.9%) and have almost surely already maxed out of UI. This doesn’t kill the deal, but is an expense that you should take into consideration."

JFox, could you please give any example of this with real dollar amounts please?

We are considering doing the same thing with my wife and I just thought I would pay her 18k and be done with it. I didn't realize there was practically an extra 18.2% in taxes.

Example: Physician makes 500k as IC and wishes to make pay wife 18k to max a 401k. Does it even make sense? Does it make sense at higher amounts vs. Lower amounts of IC pay? Thanks for all your help!

[jfoxcpacfp]

ShahMD wrote:

“Something you need to be aware of if your wife does not already work is that you will be paying full FICA (15.3%) on her wages plus unemployment when you are paying only Medicare taxes on your income (2.9%) and have almost surely already maxed out of UI. This doesn’t kill the deal, but is an expense that you should take into consideration.”

JFox, could you please give any example of this with real dollar amounts please?

We are considering doing the same thing with my wife and I just thought I would pay her 18k and be done with it. I didn’t realize there was practically an extra 18.2% in taxes.

Example: Physician makes 500k as IC and wishes to make pay wife 18k to max a 401k. Does it even make sense? Does it make sense at higher amounts vs. Lower amounts of IC pay? Thanks for all your help!

Click to expand...

OK, let's say you net $500k. After the first $127,200 (2017 SS wage base), you pay Medicare tax of 2.9% on the remainder of $372,800. HOWEVER, if you pay your wife $20k, the state/federal income taxes net out (deducted by you, taxable to her). But 401k contributions do not reduce FICA taxes. So you would owe 15.3% FICA + unemployment taxes on a deduction that saves you only 2.9% FICA taxes.

[ShahMD]

jfoxcpacfp wrote:

ShahMD wrote:

“Something you need to be aware of if your wife does not already work is that you will be paying full FICA (15.3%) on her wages plus unemployment when you are paying only Medicare taxes on your income (2.9%) and have almost surely already maxed out of UI. This doesn’t kill the deal, but is an expense that you should take into consideration.”

JFox, could you please give any example of this with real dollar amounts please?

We are considering doing the same thing with my wife and I just thought I would pay her 18k and be done with it. I didn’t realize there was practically an extra 18.2% in taxes.

Example: Physician makes 500k as IC and wishes to make pay wife 18k to max a 401k. Does it even make sense? Does it make sense at higher amounts vs. Lower amounts of IC pay? Thanks for all your help!

Click to expand…

OK, let’s say you net $500k. After the first $127,200 (2017 SS wage base), you pay Medicare tax of 2.9% on the remainder of $372,800. HOWEVER, if you pay your wife $20k, the state/federal income taxes net out (deducted by you, taxable to her). But 401k contributions do not reduce FICA taxes. So you would owe 15.3% FICA + unemployment taxes on a deduction that saves you only 2.9% FICA taxes.

Click to expand...

If She just gets paid as an IC 1099, then all these taxes can be avoided right? Just pay her 18k and she deducts the 18k as an above the line deduction for her own solo401k she will have to make herself? Am I thinking about this incorrectly???

[Zaphod]

ShahMD wrote:

jfoxcpacfp wrote:

ShahMD wrote:

“Something you need to be aware of if your wife does not already work is that you will be paying full FICA (15.3%) on her wages plus unemployment when you are paying only Medicare taxes on your income (2.9%) and have almost surely already maxed out of UI. This doesn’t kill the deal, but is an expense that you should take into consideration.”

JFox, could you please give any example of this with real dollar amounts please?

We are considering doing the same thing with my wife and I just thought I would pay her 18k and be done with it. I didn’t realize there was practically an extra 18.2% in taxes.

Example: Physician makes 500k as IC and wishes to make pay wife 18k to max a 401k. Does it even make sense? Does it make sense at higher amounts vs. Lower amounts of IC pay? Thanks for all your help!

Click to expand…

OK, let’s say you net $500k. After the first $127,200 (2017 SS wage base), you pay Medicare tax of 2.9% on the remainder of $372,800. HOWEVER, if you pay your wife $20k, the state/federal income taxes net out (deducted by you, taxable to her). But 401k contributions do not reduce FICA taxes. So you would owe 15.3% FICA + unemployment taxes on a deduction that saves you only 2.9% FICA taxes.

Click to expand…

If She just gets paid as an IC 1099, then all these taxes can be avoided right? Just pay her 18k and she deducts the 18k as an above the line deduction for her own solo401k she will have to make herself? Am I thinking about this incorrectly???

Click to expand...

You dont get any of the social security benefits, etc...that way and also may be inappropriate for whatever position she is doing and may be hard to justify. You have to calculate the costs (3kish) vs. the deferral savings, ss buildup, etc....and see if its worth it.

[jfoxcpacfp]

ShahMD wrote:

If She just gets paid as an IC 1099, then all these taxes can be avoided right? Just pay her 18k and she deducts the 18k as an above the line deduction for her own solo401k she will have to make herself? Am I thinking about this incorrectly???

Click to expand...

Yes, you are thinking about this incorrectly. She will still owe SE taxes on her income (@Zaphod, she would get the SS benefits). It will still be deducted from your pay, saving you only Medicare taxes. She will also have to set up a separate SOLO-k for her "business" since she is not your employee. You will, however, avoid paying unemployment taxes. Ultimately, the choice of IC or W2 by you the business owner is not dependent upon which alternative will save the most taxes for you but on whether she qualifies as an employee or an IC.

[Zaphod]

jfoxcpacfp wrote:

ShahMD wrote:

If She just gets paid as an IC 1099, then all these taxes can be avoided right? Just pay her 18k and she deducts the 18k as an above the line deduction for her own solo401k she will have to make herself? Am I thinking about this incorrectly???

Click to expand…

Yes, you are thinking about this incorrectly. She will still owe SE taxes on her income (@Zaphod, she would get the SS benefits). It will still be deducted from your pay, saving you only Medicare taxes. She will also have to set up a separate SOLO-k for her “business” since she is not your employee. You will, however, avoid paying unemployment taxes. Ultimately, the choice of IC or W2 by you the business owner is not dependent upon which alternative will save the most taxes for you but on whether she qualifies as an employee or an IC.

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Of course, doh! Thanks.

[Sajimone]

Even if you pay a little more in payroll taxes.. I think it still makes sense to have wifey under your solo 401k for potential income tax deferred contribution as well as even potential Roth contributions? My wife has a Roth employee account and tax deferred employer account. Doing the payroll taxes is not difficult per se but I still review with my Cpa. In the end.. You'll end up with more in either tax free or tax deferred growth.

[jfoxcpacfp]

Sajimone wrote:

Even if you pay a little more in payroll taxes.. I think it still makes sense to have wifey under your solo 401k for potential income tax deferred contribution as well as even potential Roth contributions? My wife has a Roth employee account and tax deferred employer account. Doing the payroll taxes is not difficult per se but I still review with my Cpa. In the end.. You’ll end up with more in either tax free or tax deferred growth.

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Agreed. As I said above, it doesn't kill the deal, but you should still be aware of the cost.

[spiritrider]

There is another option rather than hiring your spouse as a W-2 employee. You can elect to treat a sole proprietorship as a "qualified joint venture". See the instructions for Schedule C.

You can do this with the spouse working as little as 500 hours, provided the spouse's task type(s) are primarily performed by that spouse. This is known as someone who "materially participates" in the business.

You elect this option by allocating the sole proprietorship's revenue and expenses in specific percentages. Then each spouse simply completes their own Schedule C and Schedule SE. You must file the forms in a joint return.

They will each have their own net self-employment income (net business business profit - 1/2 SE tax) as a basis for solo 401k contributions. The business will adopt one solo 401k plan, then each spouse will open their own account under that one plan.

It can really be a lot easier than hiring the other spouse as a W-2 employee and having to run payroll and all that encompasses. Of course, it you already have other W-2 employees, adding your spouse as one more is not too difficult.