Put Your Spouse on the Payroll – 9 No-Brainer Benefits

Updated : Dec 31, 2019 in Articles

Put Your Spouse on the Payroll – 9 No-Brainer Benefits


Welcome back to the Financially Simple Podcast.
Today we’re going to continue our deep dive into cash flow as part of our discussion for
personal finances for business owners. I’m dealing with a particular subject today which
is one that I’m often asked a lot of questions about. Maybe you’ve asked this. The question
is, should I (business owner) put my spouse on the payroll? Should I put my spouse on
the payroll? I’m going to go ahead and put a major disclaimer at the beginning of this
episode as I’m known to do because you’re gonna have to talk to your planner, specifically
about your particular situation. I give you a case in point. If you’re an S
Corporation, some of the things you’re going to talk about today – reasons why you may
consider putting your spouse on the payroll – may not be eligible to you because of the
2% rule that governs the S Corporation. So, every little thing that I’m gonna talk about
today has some caveats to it, but if you follow it and you speak with your planner, your CPA
perhaps, your CFP, whoever your business advisor is, and I’m going to tell you probably your
business advisor and your tax advisor, then you may get some really good information that
could help you build your net worth. So as part of cash flow, one of the cash flow
we’re often asked is should I put my spouse on the payroll, and many times, people are
trying to figure out how to get more income into the family, and that’s why the question
comes about. I’m gonna approach it from a different standpoint. I’m going to give you
9 reasons why you may consider placing your spouse on the payroll. As we talked about
in the previous episodes, if you’ve already done your budget and you’ve done your T chart
as I’ve talked about in the past, then you know how much money you need coming in to
your family. That’s not the issue. It’s not “Should I put my spouse on the payroll to
create more income to my family?”. Now, the question becomes, “Should I put my spouse
on the payroll for some sort of benefit?”. So I’m gonna give you 9 reasons, and these
are generic in nature, but I think you can use the concepts to speak with your advisors.
If you don’t have an advisor that thinks like this, man, reach out to me. Maybe our team
could help you. We have a number of good CPAs that we work with nationally that know small
business and work in this area. We have a number of tax attorneys that know small business
and work in this area, and some of these ideas came from them as I was preparing for this.
But I wanna give you some insight. So the number one, the absolute number one
reason I can think of to place your spouse on your business, as an employee in your business
or into your business as a potential partner or shareholder is to – number one – maximize
your 401(k) or maximize your retirement planning. So in 2019, we are eligible, we are able to
place $19,000 as an employee into our 401(k) plan. Now, if you’re over the age of 50, you
can put $25,000 in your 401(k) plan. Some of the ideas I’m going to talk about here
are going to have some payroll taxes involved, but they’re minor in nature. So I’ve done this in a scenario that we’re
gonna talk about Fred and Tina today through several scenarios. So Fred and Tina are our
target couple, and in this particular case, we’re gonna make Tina the owner of the business.
So let’s say that Tina makes $100,000 a year in income, and Tina is deferring let’s say
$25,000. She’s over the age of 50, so she can put in $25,000 into her 401(k), and the
company in this illustration is going to match $25,000, so Tina’s putting in $25,000, and
the company is matching $25,000. Now, that could be through a profit share. It could
be through a Safe Harbor. It could be through a pure match. I’m not going to get into those
details today, but nonetheless, she’s putting in 25. The company’s putting in 25. So we
have a total now, going into the company of $50,000. But what if we add Fred to the payroll, and
instead of paying Tina $100,000, let’s just pay Tina $75,000? And then, we’re gonna take
the $30,000 that we were paying Tina, and we’re gonna give it to Fred. So Tina makes
$70,000; Fred makes $30,000. So we’re still getting the same exact income from the business
as before, but now we are splitting that income between husband and wife in this case. It
can be significant others. Nonetheless, you’re going to put your spouse, in this case, on
the business. And in this case, Tina’s making $70,000, and Fred’s making $30,000. Now, if
Tina makes $70,000, she can still put her $25,000 into the company. In 2019, Tina can
put in $25,000. She made $70,000, so she can put in $25,000. Guess what? So can Fred. So now, Tina puts in $25,000, and Fred, because
he now makes $30,000, he can now put in $25,000. And to keep it super simple, let’s say the
company’s match of $25,000…We’re just gonna split it between Fred and Tina. So, Tina gets
$17,500, and Fred gets $7,500. The difference being is that before by not adding Fred to
the business, Tina was only able to defer $50,000. Now, they’re able to defer $75,000
just by splitting the salaries and adding your spouse to the business. It’s an excellent
way to maximize. Now, we’re gonna come back to this, but there
is a reason why I’m only paying Fred $30,000. We’re gonna talk about this in a few points
about Social Security, but I want you to just tuck that away in your head as a little nugget
we’re gonna speak about here in a few minutes. So that is, to me, the primary reason, the
number one reason to place your spouse as a member, as an employee potentially, as a
unit, as a member, as a shareholder, whomever on your business. The number one reason I
can think of is for retirement maximization. In this case, they used a 401(k) example.
The same thing works with a Simple. You can run a number of different scenarios here using
whatever plan that your particular company has, but I like the 401(k) for small business
owners. It’s an excellent plan for maximizing your net worth. So that’s the number one reason. So here’s some reasons why you may place your
spouse on the business as an employee that you may not have thought about. So the first
one is health insurance benefits. It may, it may, be cheaper to cover your spouse as
an employee rather than a dependent on your health plan. You see, many times we’ll add
the primary business owner as the covered employee, and then we’ll put the non-covered
employee, or the spouse who doesn’t work, as a dependent, but it may be cheaper to add
your spouse to the business because they can get
cheaper health insurance. Just a thought. And while we’re talking about health insurance,
by adding your spouse, you may be able to create an advantage by using a Health Riembursement
Arrangement, or an HRA is what we call these. Now, these strategies work really good for
a sole proprietorship or a C Corporation. They’re not really good for an S Corporation
unless you couple it with a sole prop management company. That’s a whole strategy for another
day, but figure that a sole prop or a C Corp can use an HRA. A Health Reimbursement Account,
an HRA, a Health Reimbursement Arrangement some people call it or a Heath Reimbursement
Account is an IRS approved tax approved health benefit plan that’s basically going to reimburse
the employee, in this case – your family, for out of pocket medical expenses and your
health insurance premiums. So it’s a business deduction. It’s 100% funded
by the business or the employer, and the terms of the arrangement can provide the very first
dollars for your medical coverage until your health insurance kicks in, so you may go in
and put a high deductible health insurance plan in place that has a very low coinsurance
amount so the maximum out of pocket deductible may be $25,000. If you know you’re going to
have a lot of surgeries or whatever, if you know you’re going to be dealing with this,
an HRA may come into play. So you can ride the deductible way up, and therefore, you’re
able to now deduct (if it’s done right) all the medical expenses AND the premiums at the
company level, not on the Schedule A level. So it’s an excellent little benefit here,
an HRA. There’s a lot of rules. I’m gonna go over
some real fast ones here. This is not an exhaustive podcast or document on an HRA, but here’s
some basic little rules. First of all, you’re probably gonna need a health insurance plan
to participate. You can’t do it without a health insurance plan in most cases. The business
owns the HRA. You do not, so whatever money you put into the HRA belongs to the business.
It’s actually on the balance sheets of the business. Only the business can put money
into an HRA. You personally can’t fund money into the HRA. It’s a business asset. The HRA
does not earn interest, so it’s unlike an HSA, a Health Savings Account. Whenever you
put money into an HSA, you can purchase stocks, bonds, mutual funds, real estate, businesses.
I mean, there’s a number of ways you can play with the HSA if it’s properly utilized. The
HRA does not earn any interest. It can reimburse anything that’s on IRS publication 502. The
502 gives you the guidelines of what can be reimbursed and the HRA can reimburse those
things. The business determines the amount that is contributed to the HRA. The unused
dollars on the HRA stays in the company, so they’re not like an HSA. They don’t belong
to you, and finally, the money can be used to pay for your family medical expenses. So
an HRA may be a reason, depending on your health conditions, to include your spouse
on the business as an employee. Now we’re gonna get into some Social Security
ideas, and I’m gonna start by couching some knowledge for you. Many times, I’ll see individuals
who place their spouse on their company so they can “maximize Social Security.” In fact,
this past week, I ran into a couple that has just engaged our company Heritage Investors
to help them prepare themselves for retirement. They’re a business owner couple. They do quite
well in revenue, almost over $10 million a year in revenue. Great little earnings. But
in their S Corporation, they pay each other $100,000. When I asked them, “Why are you
paying yourself each $100,000?” they said, “Well, we just figured that’s the best way
to get the most bang for our bucks for Social Security,” and….. it’s not. So let me give you some knowledge here. In
that case with both the couple, we’re gonna call them Fred and Tina again, and Fred and
Tina’s position… Both of them are putting $100,000. Neither one of them are maxing out
the Social Security allowable limit. So this year, it’s right at $129,000, so I always
say $130,000. If they were to receive a W-2 in the amount of $130,000, then they would
be maxing out, or that individual would be maxing out, the Social Security credits for
the calculation purposes. So they’re not. Neither one of them are maxing out. But, get
this. Let’s say you have a non-working spouse who’s
never worked a day in your life, and one spouse has been pushing $130,000 for 10 years, and
they’re fully qualified. They’re fully insured is what we would call it. The non-working
spouse is eligible for 50% of the working spouse’s benefits. So let’s say for simplicity
that whenever we retire, the working spouse is going to get $3,000 a month in Social Security
benefits. The non-working spouse, who’s never worked a day in their life, is going to be
eligible for 50%, so $1,500 a month in benefits. That’s pretty amazing. Most people don’t realize
that. So one of the strategies we’re able to do,
and we worked with this with one of our executive consultants, is we’ll do a swapping strategy.
Now, you’ve gotta be tactical. You’ve gotta know how to play the game, I wanna say. It’s
really not playing a game; it’s just using planning. What we’ll do is we’ll fully maximize
one business owner’s pay for a period of 10 years to fully max it out, and then, with
the help of the consultants and many times planners will get involved and all sorts of
Social Security calculations, but with the help of the team, we’ll go in and swap. We’ll
shift the income to the other partner or to the other employee. Change duties within the
company. Totally change it all up and now try to maximize two incomes over a period
of time. That’s a great way to do it. You may say, “Well, Justin, why don’t you just
do it over a ten year period?”. Sometimes you can if there’s enough money
in the business cash flow. But this particular couple is paying themselves each $100,000.
What we showed them is we can actually increase one and decrease the other… Increase one
of their incomes up to $150,000 and decrease one of them down to $30,000, which pretty
much mirrored the way they were working within the company, the actual jobs, and we actually
created more Social Security benefits. So, we’re gonna talk about that. That’s called
a Social Security arbitrage. In my particular case that I typed up here
that I’m going to read to you… Let’s say Fred this time owns the company, and Fred
is being paid $120,000 from his company, his S Corp in this case, and Tina is… I mean,
she’s rolling in it. She’s making $150,000 as an employee somewhere else. What we could
actually do is we could actually Fred’s salary down from $120,000 to $80,000, so a $40,000
reduction, and then we’re gonna give Tina that $40,000 reduction. They’re actually saving
$2,400 in Social Security taxes by doing that. You’re like, “Dude, how?” Okay, so in 2018 we had $128,400 was your
maximum number. I say $130,000 for 2019 because it’s easy to understand. So let’s say that
once you hit over $130,000 like Tina would be doing in this case (she’s already making
$150,000 at her job), we’re giving her another $40,000, she’s earning more than $130,000,
so because she’s making more than $130,000 in income, the money over $130,000 is not
taxed at the same level as those dollars beneath $130,000. There’s a little bit of taxes on
them, but for the most part, there’s not. So, we can take 6.2%, 6.2% of the $40,000,
and that is a total of $2,480 in tax savings. That’s a game. It’s called Social Security
arbitrage. We’ll often use that and create some benefit for our clients on growing their
Social Security payments for later in life. Another thing you can do with Social Security
by adding your spouse is you can add Social Security credits. So, I’m not going to get
into the way the calculation works. That’s a long, long, long story, but let’s say that
Tina has been working at a job for a couple of years, and they had some babies, and she
didn’t work for awhile, and she’s really not insured, but we know if we pull this game
off right, if we just give her $20,000 or $40,000 or $60,000 a year, we can push Tina
into a position into where now she is fully insured, and she could potentially earn more
than an non-working spouse. There’s a calculation we can do for that. By adding your spouse
to your payroll of the company, you may be able to get them fully insured or add Social
Security credits to your spouse’s calculation. So there’s a lot of things you can do with
Social Security planning which comes into effect for our long-term retirement planning
as well just by adding your spouse to it, so it’s not all about 401(k)s. It also can
come into play with Social Security. Whew. That’s a lot of information. We’re gonna wrap
this thing up here in just a second. I’m gonna give you a couple more things, and this is
going to be fast fire here, okay? So one of the things you could potentially
do by adding your spouse is legally deduct travel expenses with you and your spouse.
Now, you have to be travelling for business reasons, and your spouse has to have a legitimate
reason to travel with you. So you may say that they are your chauffeur. You may say
that they are your scheduler. They are your assistant, anything that you may have in your
business. I have dentists whose spouses are hygienists, so we end up having a legitimate
reason for the spouse to travel with the business. Then, you can create some deduction for you
and your spouse on travel. Another thing you may be able to do is get
group disability insurance. See, many times non-working spouses are not insured, but if
you add them to the payroll, and you roll them in the benefits, now you can get a little
bit of disability insurance. Again, we hope that never happens. We don’t want our spouses
who are non-working to ever become disabled, but if you add them to the company, and they
legitimately work in the company, then they could be…. we’ll get to that in a second…
then, in effect, you may be able to get them group disability insurance. I saw this a couple of years ago, and it’s
always intrigued me. I talked to several CPAs. Some of them say they agree with this. Some
of them say they don’t. I’m gonna say that I don’t have an opinion, but it’s something
worth considering. Another thing you can do is you can potentially buy a third vehicle
for your spouse as part of their job duties. Now, you have to have three vehicles. You
have to have one for you. I’m assuming it’s a business expense. You’re going to have to
have a family commuter car, a family business, or a family car. You could potentially buy
a third car that is a business expense and have a deductible business expense that way.
It’s just an interesting fact. Now, if you’re a C Corporation, by adding
your spouse to the company, you’re gonna reduce some of the taxes that are double taxed, so
that’s a benefit if you’re a C Corporation. How about this one, number 10 here is if your
spouse needs education, you could actually arrange to send your spouse back to school
and have the education expenses that are incurred, as long as they’re improving the employee
job skills, then they’ll be deductible to the company and tax free to the employees.
So think about that. Talk to your CPA, again. I’m not giving you
tax advice. That’s not my job. I’m giving you some ideas so you can go and talk to your
CPA. Some of these things may have changed in your particular state. Some of these things…
I tried to do the best to make sure some of these ideas were still legitimate. I think
they all are, but talk to your CPA. So just giving you 10 ideas that you can utilize. You say, “Justin, my CPA doesn’t talk this
way.” Reach out. We’ve got a group of CPAs that we know and trust. They’re very, very
good. We’re talking to one today. They were going through an audit, and the auditor actually
gave them a clean bill of health, which is unheard of by CPAs. So I wanna wrap this up by talking about your
employee spouse. So here’s some things you have to do if you’re going to employee your
spouse. Number one, you’ve gotta give them a job description
and an appropriate salary, or an appropriate income, for that job description. You can’t
say that your spouse is your assistant, and you’re gonna turn around and pay them $700,000.
It doesn’t work that way. So you have to have an appropriate title and an appropriate salary. You need to have your spouse complete all
the new hiring forms and treat them like any other employee. They have to sign the same
agreements. In our office, we have to have compliance manuals signed. My wife had to
sign them as she’s an employee of our company. She does our shopping for us. She does our
event scheduling for us and our event coordination. She does a lot of the postage and clerical
work for our team. Even though she doesn’t come to the office much, she does a lot of
stuff, so therefore, she’s paid and has a job description. She had to fill out the salaries. You have to make all the required deductions
and withholdings. So if you’re in a business that has a W-2, you treat your spouse as a
W-2. So just consider that. You have to include your spouse in all the
benefits programs. If you’re eligible for a 401(k), your spouse goes there. If you’re
eligible for health insurance, your spouse goes there. If you’re eligible for disability,
etc. your spouse goes there, okay? And you should be able to prove that your
spouse is actually doing the work. Come on people. So many times I see, “Well, I pay
my wife.” Well, what does she do for you? Or “I pay my husband.” Well, what does he
do for you? “Well, uh, um, I don’t know.” Come on. You’ve got to be able to prove that
they’re actually doing the work. That’s a no-brainer. And if your spouse is an officer in the business…
So like, my wife, she’s part of our membership of one of our businesses, then, she actually
has to keep the same duties as I do as a proprietor of the business. So that’s how you treat your spouse as an
employee. There’s a lot of information I just gave you, and I’m sure that some of that you
glossed over that, and I apologize. We’re trying to keep the blog up-to-date, and this
article in the full written format you can read and think about is coming out very soon,
so we hope to have this typically within a week following the release of the show. So while you’re on the blog, though, I want
you to do me a favor. I want you to sign up for our newsletter. Our newsletter has been
taking off. We’re excited about it. We’ve had almost 10,000 individual listeners of
the podcast. It’s almost pushing a monthly basis. It’s crazy how many people are listening
to the podcast, and we have a lot of people signing up for the newsletter. In the newsletter,
I get emails back like, “Hey, Justin, this is really good.” It’s short, sweet, to the
point. It gives you a couple of different things per week that you can look at and drive
some thought to your business. If you don’t have anybody that thinks like
this in your life, reach out to us. Maybe we can help you. We have a point on the blog
that says, “Work with Justin.” You can see what it’s like to work with me, what it costs,
what the details are. If you have questions, reach out to us. You know, I sign off every week by saying
this. Life is hard. It is. It is hard. But man, life is good. We are blessed beyond measure,
folks. We are. I have nothing to moan and groan about, but I realize that life can be
frustrating. I’m in the middle of tax season as we’re recording this, and CPAs and tax
attorneys and myself, we’re going crazy dealing with the new tax changes from 2017. Money
doesn’t have to be frustrating. It really doesn’t. We’re gonna continue to make our
lives, at least, financially simple. Hey ya’ll go out and create an awesome day.

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