Employing spouse as 'assistant'

[devilfish]

Hi guys,

I'm wondering if you can comment on the legality of hiring your spouse as an "assistant". I live in Canada but surely the IRS has similar rules to the CRA...

 

I am in my first few years of practice and my wife is home with the kids. My accountant suggested that I employ her as an "assistant" which essentially would be done in order to income split and save on taxes. He has many physician clients and is a well respected CPA. He assured me that this was kosher so long as you pay all of the payroll taxes/fees to the government (as any normal business would have to do...).

 

I'm a bit skeptical though... He suggested a salary of anywhere from 30-40K. In case of an audit, her job description might include things like assisting with billing codes, paperwork, etc.

I don't want to start my career on the wrong foot with tax fraud. Do people do this type of thing?

 

 

[Zaphod]

I've thought of doing this. The only annoying part is the paycheck and tax stuff but I think there are services available for that. My thing really is I would expect some actual work to get done, as it would certainly be useful for someone else to keep the books and such.

[devilfish]

Zaphod wrote:

I’ve thought of doing this. The only annoying part is the paycheck and tax stuff but I think there are services available for that. My thing really is I would expect some actual work to get done, as it would certainly be useful for someone else to keep the books and such.

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The accountant takes care of it all. I think he wants to charge 800$ a year or so.

My issue is she really would not be doing much work, certainly not enough to earn the same as my full time secretary at the office...

[Osiris]

I do think you have to live with yourself and you should do what you think is morally right. Not necessary what you can get away with.

Personally I would run away from this tax accountant.

On the other hand there is no reason to pay more tax than you are legally obliged to do.

My spouse is my practice manager and every year, we depend on the accountant to come up with what is the best assesment as to how much to pay to SSI, pay roll taxes, and put away in retirement funds for each of us.

Good luck.

 

Let us know what you decide.

 

PS I wanted to employ my child in the practice so we could put away a Roth retirement fund for  him. However we doubted we could get any meaningful work out of him, so while it would have been a great tax dodge, it was just not morally right and we never put it into action.

[Zaphod]

She would certainly be working, and I would pay her a reasonable rate based on that amount, hoping its around or over 18k that can be put right away easily. I would not rely on an accountant, there are far too many simple tech solutions that dont require one to deal with a possible shady scenario. Every accountant I've ever dealt with has been heavy on the schemes and light on ethics.

[jfoxcpacfp]

devilfish wrote:

I am in my first few years of practice and my wife is home with the kids. My accountant suggested that I employ her as an “assistant” which essentially would be done in order to income split and save on taxes. He has many physician clients and is a well respected CPA. He assured me that this was kosher so long as you pay all of the payroll taxes/fees to the government (as any normal business would have to do…).

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I'll address this as if you were in the USA. Canadian law will differ.

I'm having trouble figuring out how this will save you taxes unless you are doing this in order for her to contribute to a SOLO-401k. You will have to pay extra SS that you are surely not paying for yourself.

Now, let's address paying your wife $30k - $40k for doing...almost nothing? I couldn't tell from your post. Billing and coding are fairly well-paying jobs. If she is filling that role, the pay sounds reasonable. But if you are doing this merely as a way to shelter $ in a SOLO-k, then yes, I would be uncomfortable with it. However, if she is qualified to do the work, why not hire her to do those tasks?

To answer your last question, you wouldn't believe the sort of things people do. Even the sort of things I've known CPAs to recommend.

 

[devilfish]

jfoxcpacfp wrote:

devilfish wrote:

I am in my first few years of practice and my wife is home with the kids. My accountant suggested that I employ her as an “assistant” which essentially would be done in order to income split and save on taxes. He has many physician clients and is a well respected CPA. He assured me that this was kosher so long as you pay all of the payroll taxes/fees to the government (as any normal business would have to do…). 

Click to expand…

I’ll address this as if you were in the USA. Canadian law will differ.

I’m having trouble figuring out how this will save you taxes unless you are doing this in order for her to contribute to a SOLO-401k. You will have to pay extra SS that you are surely not paying for yourself.

Now, let’s address paying your wife $30k – $40k for doing…almost nothing? I couldn’t tell from your post. Billing and coding are fairly well-paying jobs. If she is filling that role, the pay sounds reasonable. But if you are doing this merely as a way to shelter $ in a SOLO-k, then yes, I would be uncomfortable with it. However, if she is qualified to do the work, why not hire her to do those tasks?

To answer your last question, you wouldn’t believe the sort of things people do. Even the sort of things I’ve known CPAs to recommend.

 

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The tax savings would be in the sense of shifting some of my income to her as a salary since she would be in a much lower tax bracket. Income splitting is not allowed in Canada, so this would be a way around that.

However, the more I think about it the more I am uncomfortable with it. I pay a billing agency less than 1% of my billings...

The estimated tax savings after fees would be in the range of 5000-7000$ so I don't think that is worth me losing sleep at night.

[uptoolate]

If you are incorporated then this is pretty standard in Canada.  Incorporation is a pretty sweet deal for physicians in Canada and allows for significant tax deferral, income splitting and income smoothing/deferral. If you are not incorporated then I'm not sure how this would work.  Any practice income left in the corporation up to 500k per year is taxed at a very favourable rate.  It has fallen in recent years and I think it is currently somewhere around 12%.  This beats the heck out of our current top marginal rate on personal income.  As well, salary can be paid to family members to allow some degree of income splitting and dividends can also be paid to family members which can ultimately save tax dollars as they are expenses to the corporation.  The corporation can also hold insurance policies and provide health/drug/dental benefits for the family if needed. For me, the greatest benefit was income smoothing which allowed me to retire relatively early.  The newly elected federal government made some noise about professional corporations as a tax avoidance strategy but did not make any significant changes in their first budget.

 

[jfoxcpacfp]

uptoolate wrote:

If you are incorporated then this is pretty standard in Canada.  Incorporation is a pretty sweet deal for physicians in Canada and allows for significant tax deferral, income splitting and income smoothing/deferral. If you are not incorporated then I’m not sure how this would work.  Any practice income left in the corporation up to 500k per year is taxed at a very favourable rate.  It has fallen in recent years and I think it is currently somewhere around 12%.  This beats the heck out of our current top marginal rate on personal income.  As well, salary can be paid to family members to allow some degree of income splitting and dividends can also be paid to family members which can ultimately save tax dollars as they are expenses to the corporation.  The corporation can also hold insurance policies and provide health/drug/dental benefits for the family if needed. For me, the greatest benefit was income smoothing which allowed me to retire relatively early.  The newly elected federal government made some noise about professional corporations as a tax avoidance strategy but did not make any significant changes in their first budget.

 

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Thanks for commenting! It sounds like this is SOP in Canada, then. Not something I am familiar with advising on so thanks for stepping in. Still don't know that I would be comfortable with pay for no work, but perhaps this is overlooked by the CRA?

[uptoolate]

I'm sure the amount of work done by spouses or children is quite variable but definitely the idea is not 'no work'.  It could be billing, which is generally very straightforward in Canada, book-keeping, staff management, in office support, buying office supplies or the like.  In our office we would have various children in during the summer doing various things.  Mostly filing. Dividends can be paid from the corporation without work being done of course.