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Sole Proprietor Hiring Wife for Miscellaneous Work

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  • Hank
    replied
    Originally posted by beagler View Post
    I did this for a few years. It wasn't worth it due to FICA tax. FICA credit doesn't count for anything unless spouse makes more than 1/2 of your income. FICA has a disincentive for spouse to work! (Not what we need to save social security.)

    The benefit was I have a very high match 401k with Roth, so all her salary plus match was put there. You could deduct business travel with spouse completely if legitimate.
    Slight correction: It isn't necessarily half your income. It't the lower of half your income or half of the social security taxable wage base. For 2020, that would be half of $137,700 (or $68,850). Cash balance plans, 401(k)s, and mega backdoor Roth contributions can make employing a spouse a decent deal.

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  • beagler
    replied
    I did this for a few years. It wasn't worth it due to FICA tax. FICA credit doesn't count for anything unless spouse makes more than 1/2 of your income. FICA has a disincentive for spouse to work! (Not what we need to save social security.)

    The benefit was I have a very high match 401k with Roth, so all her salary plus match was put there. You could deduct business travel with spouse completely if legitimate.

    Leave a comment:


  • jfoxcpacfp
    replied
    Yes, professionals are allowed to have employees. Depending on the state they are in, they may not be able to have non-professional partners. You would have to deal with payroll administration, which will complicate your current relatively simple tax filing requirements.

    As Tim alluded, you also will be trading income taxed at 2.9% for FICA for income taxed at 15.3% for FICA just for the purpose of putting $$ into a tax-deductible solo-k. This starts you guys way behind the 8-ball on investment earnings you will need to catch up when compared to simply funding a taxable account. Long story short, I don’t believe it is worth it.

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  • Tim
    replied
    Yes you can pay your spouse for work performed in your business.

    The income will be taxable but deductible to the business. Depending on how you classify her employment will determine the withholding and tax payment responsibilities (employee vs contractor) and whether she can open an i401k.
    Note, SS and Medicare taxes will be paid on the w-2 wages as well. Best case is you will pay 15.3% SS tax to the IRS for the privilege of retirement savings contributions.
    Another alternative is to fund a Roth and set up her own taxable account in lieu of paychecks and save the taxes.

    https://www.irs.gov/businesses/small...ed-or-employee

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  • Sole Proprietor Hiring Wife for Miscellaneous Work

    I'm an emergency physician who is an independent contractor. I also serve as medical director for 3 fire departments and a paramedic training program.

    My wife does miscellaneous work for me -- paying bills related to business, going to post office, etc.

    Am I allowed to employ her and reimburse her for her work even though she isn't a physician, or must she be in the same line of work as me? What would be involved as a sole proprietor to make this happen? Do I pay her on a W-2 (therefore, use a payroll company to make it easier)? Can she use her earnings and put into an Individual 401(k)? I currently have one established with Vanguard.
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