Paying spouse from an S-corp

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
fyre4ce
Posts: 349
Joined: Sun Aug 06, 2017 11:29 am

Paying spouse from an S-corp

Post by fyre4ce » Mon Aug 05, 2019 3:06 pm

My spouse is an independent contractor and the sole owner of an S-corp. Up to this point, the corp has only paid her; she's the one who performs the work that brings in the revenue. I'm considering if there are some tax advantages to having me get paid from the business. I believe I perform enough support work for the business, including financial and bookkeeping support, and I've been directly involved in a particular business project this year, to justify a payment in the $10-20k range. One major benefit is that I could potentially contribute 25% of earnings into a spousal account of the Solo 401k. I already contribute the maximum annual elective deferral in my full-time W-2 job (unrelated). A few questions for the experts here:

-Could I get paid from the business on a 1099 instead of a W-2? This seems more attractive in a few ways. I'd still pay payroll tax on Schedule C/SE, but only Medicare tax as my other W-2 earnings are greater than the SSWB. If I got paid on a W-2, the business would withhold both SS and Medicare, and I'd get the employee half of SS back at the end of the year, but I think there's no way to recover the employer side (whereas if I pay payroll tax on Schedule SE it's automatically just Medicare). 1099 income would also count as QBI on our personal return whereas W-2 would not. I believe any business expenses I would have should be deductible in either case, on a Schedule C, or from the corporation.

-If I get paid on a 1099 instead of a W-2, can I still get a 25% Solo 401k spousal contribution? If not, I suppose I could open my own Solo 401k.

-If we had a Solo 401k that supported the Mega Backdoor Roth, and I get something like a $5,000 employer match, does that mean I could MBR up to $51k ($56k - $5k)? If so this seems like another potential big benefit.

Thanks in advance!

Edit: If it matters, I believe the work I am doing for the business could be reasonably defended as "independent contractor" type work - my involvement in a project is as a consultant for a fixed length of time in a field that's not related to her trade, and no-one pays their bookkeeper and financial advisor on a W-2, those are 1099 trades too.

Spirit Rider
Posts: 11864
Joined: Fri Mar 02, 2007 2:39 pm

Re: Paying spouse from an S-corp

Post by Spirit Rider » Mon Aug 05, 2019 3:33 pm

There is no increase in total employer contributions from your contributions unless she has reached the annual addition limit and could not make them herself.

Is either or both of your respective W-2 Box 3 Social Security SS earnings > the SS maximum wage base MWB (2019 = $132,900)?

If both are < or > the SS MWB there is no benefit to your W-2 pay/employer contributions over hers. Only if hers is < and yours > will there be a FICA benefit.

Total employee + employer contributions can not exceed the annual addition limit. You would need $56K in W-2 wages to maximize the MBR. Your wife would have to amend her current one-participant 401k plan to a custom 401k. No one provides that free of charge.

It is never proper to pay an immediate family member on a 1099. There is no way for them to be classified as an "independent" contactor. It would fail all IRS control requirements.

Topic Author
fyre4ce
Posts: 349
Joined: Sun Aug 06, 2017 11:29 am

Re: Paying spouse from an S-corp

Post by fyre4ce » Mon Aug 05, 2019 4:12 pm

Spirit Rider wrote:
Mon Aug 05, 2019 3:33 pm
There is no increase in total employer contributions from your contributions unless she has reached the annual addition limit and could not make them herself.

Is either or both of your respective W-2 Box 3 Social Security SS earnings > the SS maximum wage base MWB (2019 = $132,900)?

If both are < or > the SS MWB there is no benefit to your W-2 pay/employer contributions over hers. Only if hers is < and yours > will there be a FICA benefit.

Total employee + employer contributions can not exceed the annual addition limit. You would need $56K in W-2 wages to maximize the MBR. Your wife would have to amend her current one-participant 401k plan to a custom 401k. No one provides that free of charge.

It is never proper to pay an immediate family member on a 1099. There is no way for them to be classified as an "independent" contactor. It would fail all IRS control requirements.
Thanks, Spirit Rider. You're exactly who I hoped would respond. :-)

My W-2 wages for this year from my other employment will be > $132,900. Her W-2 wages from the business are expected to be around $100k this year. Obviously, we set her salary - we are trying to set her salary so that her W-2 wages will be in the 50-60% range of net business income (W-2 + K-1). My understanding is that if we kept the business's total W-2 wages the same, and traded mine for hers 1:1 (say, $10k to me and $90k to her), we would save her employee half of SS taxes (but not the employer half). And, the total amount we could contribute to the Solo 401k would be the same; she could contribute less in equal amount to what I could contribute (25% of wages). So, maybe this is worth doing.

Does a 401k plan need to be amended to allow spousal contributions (ignoring MBR for the moment)? If so then it would probably not be worth the hassle of paying me anything.

I also understand that, if I am receiving wages from the business, I get my own independent $56k limit, correct?. I already "use up" my elective deferral at my full-time job, so my contributions would be limited to 25% of wages. But let's say her salary in a future year is $200k and she is already able to max out her 401k ($19k + 25% * $200k > $56k). By paying me $20k and lowering her salary to $180k, I'd be able to contribute $5k to the spousal 401k account and her contributions would still be maximum - am I missing something in this scenario?

I got what you say about not paying spouse on a 1099 - thanks.

I also got that MBR must be limited to total wages, so if I earn $20k then I can MBR at most $20k. That's still not bad though, if the spouse gets an independent limit.

Spirit Rider
Posts: 11864
Joined: Fri Mar 02, 2007 2:39 pm

Re: Paying spouse from an S-corp

Post by Spirit Rider » Mon Aug 05, 2019 5:21 pm

fyre4ce wrote:
Mon Aug 05, 2019 4:12 pm
My understanding is that if we kept the business's total W-2 wages the same, and traded mine for hers 1:1 (say, $10k to me and $90k to her), we would save her employee half of SS taxes (but not the employer half).
You would save both halves. Once you reach the SS MWB, no SS taxes are required for both employee and employer.
Does a 401k plan need to be amended to allow spousal contributions (ignoring MBR for the moment)?
No, a spouse employee is permitted in all one-participant 401k plans.
By paying me $20k and lowering her salary to $180k, I'd be able to contribute $5k to the spousal 401k account and her contributions would still be maximum - am I missing something in this scenario?
As long as her wages are still "reasonable compensation", reducing her wages to pay you. Is fine as long as your wages are at a fair market value rate and for the number of hours actually worked on business necessary tasks.

Topic Author
fyre4ce
Posts: 349
Joined: Sun Aug 06, 2017 11:29 am

Re: Paying spouse from an S-corp

Post by fyre4ce » Mon Aug 05, 2019 5:31 pm

Spirit Rider wrote:
Mon Aug 05, 2019 5:21 pm
fyre4ce wrote:
Mon Aug 05, 2019 4:12 pm
My understanding is that if we kept the business's total W-2 wages the same, and traded mine for hers 1:1 (say, $10k to me and $90k to her), we would save her employee half of SS taxes (but not the employer half).
You would save both halves. Once you reach the SS MWB, no SS taxes are required for both employee and employer.
I thought that the business would be required to withhold SS taxes on wages to me, even though my other W-2 job pays more than the SSWB. I know I can get back my employee half of the SS tax on Schedule 5, but I didn't think there was a similar way to recover excess SS tax from the business side. Is there a way to recover it, or can I just tell payroll that my other job exceeds the SSWB and to withhold no SS tax?

Spirit Rider
Posts: 11864
Joined: Fri Mar 02, 2007 2:39 pm

Re: Paying spouse from an S-corp

Post by Spirit Rider » Mon Aug 05, 2019 8:33 pm

fyre4ce wrote:
Mon Aug 05, 2019 5:31 pm
Spirit Rider wrote:
Mon Aug 05, 2019 5:21 pm
fyre4ce wrote:
Mon Aug 05, 2019 4:12 pm
My understanding is that if we kept the business's total W-2 wages the same, and traded mine for hers 1:1 (say, $10k to me and $90k to her), we would save her employee half of SS taxes (but not the employer half).
You would save both halves. Once you reach the SS MWB, no SS taxes are required for both employee and employer.
I thought that the business would be required to withhold SS taxes on wages to me, even though my other W-2 job pays more than the SSWB. I know I can get back my employee half of the SS tax on Schedule 5, but I didn't think there was a similar way to recover excess SS tax from the business side. Is there a way to recover it, or can I just tell payroll that my other job exceeds the SSWB and to withhold no SS tax?
What you just stated is correct for your "net" SS taxes. You confused me by referring to her employee half SS taxes.

Topic Author
fyre4ce
Posts: 349
Joined: Sun Aug 06, 2017 11:29 am

Re: Paying spouse from an S-corp

Post by fyre4ce » Tue Aug 06, 2019 12:35 am

Thanks, again, for your expertise!

Post Reply