Should my wife hire me?

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fredflinstone
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Should my wife hire me?

Post by fredflinstone » Fri Apr 30, 2010 6:46 am

I am in my early 40s, currently retired/unemployed (recently sold a business), but I do 5-10 hours per week of work for my wife's remaining business. I am not paid for this work.

We are in the highest tax bracket and so would like to maximize our contributions to tax-shielded retirement accounts.

Question: should my wife pay me for the work I do?

Disadvantages: more paperwork; payroll taxes.

Advantage: can make contributions to a tax-shielded retirement plan such as a SEP IRA.

If the answer to my question is yes, should I be paid as a 1099 contractor or as an employee? I think legally, one could make an argument either way but which is better in terms of minimizing taxes and paperwork?

Thanks!

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abuss368
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Post by abuss368 » Fri Apr 30, 2010 8:11 am

I would discuss with your CPA who may better understand your overall tax situation.

The Wizard
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Post by The Wizard » Fri Apr 30, 2010 10:40 am

This sounds like a SUBTERFUGE to avoid taxes.
If I was yer IRS auditor, I'd make sure you had a nice strong outdoor clothesline so I could hang you up to dry when we're done.

Consult a CPA fer sure...

pshonore
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Post by pshonore » Fri Apr 30, 2010 10:49 am

How is he avoiding taxes? Assuming he gets a payment commensurate with work/time spent and files a joint return, I don't see any thing illegal here. However someone is going to pay 15.3% SE tax one way or another on those "wages" so there may not be a lot of savings.

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Post by raddle » Fri Apr 30, 2010 10:59 am

The Wizard wrote:This sounds like a SUBTERFUGE to avoid taxes.
If I was yer IRS auditor, I'd make sure you had a nice strong outdoor clothesline so I could hang you up to dry when we're done.

Consult a CPA fer sure...
This idea is not about avoiding taxes. It merely lets you DELAY some income taxes until retirement, just like an ordinary retirement account. Surely no reasonable person considers a 401k to be tax fraud.

I couldn't say for sure whether it is a good idea without knowing more about the situation. I agree this is a question for a practicing CPA.

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greenspam
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Post by greenspam » Fri Apr 30, 2010 11:03 am

i'm not 100% sure, but i think if you hire a family member, they have to be a W2 employee, not a 1099 contractor.
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fredflinstone
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Post by fredflinstone » Fri Apr 30, 2010 11:06 am

"This sounds like a SUBTERFUGE to avoid taxes."

I don't appreciate the attack on my character. The IRS allows family members to hire each other, provided they are doing bona fide work. See, e.g.:

http://www.entrepreneur.com/hiringcente ... 95248.html

http://www.businessmanagementdaily.com/ ... Page1.html


If you think hiring a spouse violates the law, provide evidence rather than cast aspersions on me.

djw
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Post by djw » Fri Apr 30, 2010 3:54 pm

Some questions that might help clarify your situation:

Is it a sole proprietorship, partnership, or corporation?

Does the business pay your wife and issue her a W2 each year?

Does it make a profit?

Will the additional SS taxes increase your eventual benefit by replacing a lower income year (remember that the IRS jacks up prior years by applying a multiplier)?

Does a SEP IRA currently exist for your wife and/or other employees?

If your jointly reported income is less than $10,000 and thus insufficient to support $5,000 IRA contributions for each of you, are you paying income taxes at all?

I suppose you could be planning to make a maximum Roth IRA contribution, contemplating that the tax-free withdrawals sometime in the future will make this deal worth your while?
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pshonore
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Post by pshonore » Fri Apr 30, 2010 4:00 pm

djw wrote:Some questions that might help clarify your situation:

Is it a sole proprietorship, partnership, or corporation?

Does the business pay your wife and issue her a W2 each year?

Does it make a profit?

Will the additional SS taxes increase your eventual benefit by replacing a lower income year (remember that the IRS jacks up prior years by applying a multiplier)?

Does a SEP IRA currently exist for your wife and/or other employees?

If your jointly reported income is less than $10,000 and thus insufficient to support $5,000 IRA contributions for each of you, are you paying income taxes at all?

I suppose you could be planning to make a maximum Roth IRA contribution, contemplating that the tax-free withdrawals sometime in the future will make this deal worth your while?
Think original post says he's in the highest tax bracket. Probably means no ROTH possible.

xerty24
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Re: Should my wife hire me?

Post by xerty24 » Fri Apr 30, 2010 10:29 pm

fredflinstone wrote:I am in my early 40s, currently retired/unemployed (recently sold a business), but I do 5-10 hours per week of work for my wife's remaining business. I am not paid for this work.

We are in the highest tax bracket and so would like to maximize our contributions to tax-shielded retirement accounts.

Question: should my wife pay me for the work I do?
Ignore the ignorant people who think you must conduct your affairs to maximize your tax liability. Let them donate to the gov't debt if they like.

With the correct setup, you should almost certainly arrange to be paid. Payroll taxes are 15%, but you do get some SS benefit from them in retirement, at least if you haven't already maxed out your credits. Obviously your actual salary nets out against the business's loss (or reduced profit).

On the plus side, you can get a Roth 401k and employer contributions / after-tax contributions / matching that can be up to $49K in Roth style savings. This is worth well over $0.15 for every dollar over a ~20 year horizon, more like $0.50-0.60 depending on your investments and their tax efficiency (and that's without valuing the SS benefit).

mhalley
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Post by mhalley » Fri Apr 30, 2010 10:38 pm

Would another advantage be building up more in the way of SS credits? Or would the amount of money you make not be worthwhile in calculating that?
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expat
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Re: Should my wife hire me?

Post by expat » Fri Apr 30, 2010 10:56 pm

fredflinstone wrote:
Question: should my wife pay me for the work I do?
Absolutely. My CPA recommended I do the same.

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Mel Lindauer
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Post by Mel Lindauer » Fri Apr 30, 2010 11:04 pm

Don't know if it's still the same or if the law has changed, but when I owned my business, I hired my wife and the law stated that a husband working for a wife or a wife working for a husband didn't have to pay SS taxes. You might want to check into this, since it's possible that you wouldn't get any additional benefits for paying SS taxes you might not need to pay.
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Jack
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Post by Jack » Fri Apr 30, 2010 11:12 pm

Mel Lindauer wrote:Don't know if it's still the same or if the law has changed, but when I owned my business, I hired my wife and the law stated that a husband working for a wife or a wife working for a husband didn't have to pay SS taxes. You might want to check into this, since it's possible that you wouldn't get any additional benefits for paying SS taxes you might not need to pay.
For a spouse, you must pay FICA (social security and medicare) but you don't have to pay FUTA (federal unemployment tax).

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oneputt
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Re: Should my wife hire me?

Post by oneputt » Fri Apr 30, 2010 11:15 pm

fredflinstone wrote: Question: should my wife pay me for the work I do?
When I asked my accountant that same question about putting my wife on the payroll of my business he advised against it. The 15% payroll tax is a killer and negates all other advantages. You should check with your accountant for your specific circumstances. Cheers.

billern
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Post by billern » Sat May 01, 2010 12:10 am

The Wizard wrote:This sounds like a SUBTERFUGE to avoid taxes.
If I was yer IRS auditor, I'd make sure you had a nice strong outdoor clothesline so I could hang you up to dry when we're done.

Consult a CPA fer sure...
You are actually 100% wrong on this one. The IRS has more problem with people who have a schedule C where both of the spouses are doing the work where one spouse is getting all of the income and self-employee taxes.

You generally are going to pay more taxes if each spouse picks up 50% of the income (or their respective share) based upon the S/E tax calculations.

The ways it can be a benefit with one spouse hiring the other is as follows:
1) if one spouse needs more social security credits to get more benefits, the payroll taxes paid can get a high return
2) you can offer some employee benefits to a spouse pre-tax (such as a family health insurance plan)

As long as the spouse does the work and gets paid a reasonable wage, there is nothing wrong with any of this.

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Culture
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Post by Culture » Sat May 01, 2010 9:28 am

Wow. A topic where I actually know what I am talking about. I am a sole proprietor and I have gone through this exact question myself. My wife is my only employee. We started with my wife as unpaid, moved to paying her as a contractor and currently pay her as a W-2 employee.

Here are this issues as I see them:

We moved her from unpaid to a contractor for the following reasons:

1) This allowed us to open a solo 401k in her name. A solo 401(k) provides for the largest tax deferred savings for a low paid employee (16k+25%).
2) This provided for a modest SS payment in her name. SS is actually a good investment for low paid employees.
3) Our accountant pushed me to make her a paid employee, indicating this was required by the IRS.

We moved her from contractor to W-2 employee for the following reason:

1) This allowed be to place her into my pension plan. Big, big tax savings.
2) Our accountant was uncomfortable with her being defined as a contractor employee. While she agree my wife was a textbook example of a contract employee, she felt this could trigger an IRS audit.

A couple of notes:

1) You do not have to pay unemployment taxes for a spouse employee (in Texas anyway).
2) You have to pay FICA taxes on a spouse employee.
3) If you hire an under-18 child, you do not have to pay FICA taxes for the child.
4) Adding a W-2 employee adds a lot of paperwork.
5) A solo 401(k) involves a lot of paperwork (You have to file a 5500 every year, yuck).

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Post by chaz » Sat May 01, 2010 11:30 am

There has to be a Workers' Comp ins policy to cover employees.
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pshonore
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Post by pshonore » Sat May 01, 2010 11:53 am

In some states, family members can be excluded from a comp policy (and if they're the only employee, then a comp policy may not be needed). Check with your agent. Actually, even independent contractors should be covered by a comp policy unless they have their own or are covered by another one.

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Post by deerhunter » Sat May 01, 2010 12:52 pm

I have also had experience with this. One of the biggest advantages to hiring your spouse is you can set up medical insurance and all medical costs such as eye, dental etc that can be business tax deductible. Our CPA got us into this through a company called AgriBiz which is the trustee needed for such a setup.
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djw
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Post by djw » Sat May 01, 2010 8:34 pm

To briefly review the 1099 vs. W2 (independent contractor vs. employee) issue:

A person who does work for you is generally an employee unless you can clearly and convincingly prove otherwise. Here are the questions that her WC insurance company, the IRS, etc. will ask. If the answer to all or most of these questions is "No" expect to be told that the husband (or anyone else, for that matter) is an employee, not an independent contractor:

1. Does he do work for anyone else?
2. Does he have his own business name? business address? business phone? business vehicle? business tools?
3. Does he advertise in any way shape or form to find, or at least attempt to find, additional clients?
4. Is there a signed contract?
5. Does he do work of a particular type representing a particular special skill (accounting, janitorial, delivery), not just whatever needs doing?
6. Does he file a Schedule C on his 1040 for his own business?
7. Does he set his own hours and decide for himself how to accomplish the independent contracting work? If the boss tells him when to show up, when to leave, provides all tools and materials, tells him exactly how to do the job, and otherwise acts like his boss, he's not an independent contractor.

Another hidden cost of being an employee:
If he does anything but sit at a desk, the workers' comp premium could be significant (incl. if he drives a car as part of his "job" or does physical labor of any kind)
Love many, trust few, and always paddle your own canoe

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