Should I Hire My Spouse and Pay Them from My Business or Side Gig Income?
- 4 days ago
- 7 min read
We often receive questions in our online communities for doctors about tax savvy ways to handle self-employed income, with many physicians asking about if it makes sense to pay their spouse through their side gig or private practice business income. Unlike paying your children through your side income or business, the question of paying a spouse is much more nuanced. In fact, you could end up paying more in taxes than you would have had you not. Below, we’ll cover the advantages and disadvantages of paying your spouse through your business, what to be careful about, and when it might make sense.
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Why do people consider hiring their spouse as an employee through their business?
When might you consider hiring your spouse through your business?
What payroll taxes have to be paid to your spouse, and why does this not result in lower taxes paid?
But what if I pay them as a 1099 contractor and not an employee? Then I wouldn’t have payroll taxes
Why do people consider hiring their spouse as an employee through their business?
Physicians are often in high tax brackets and often look to side gigs or self-employed income as a way to get tax advantaged income, tax deductions, or otherwise implement tax strategy. There is a common misconception or assumption that hiring your spouse is a slam dunk way to save on taxes on your side income.
It’s not nearly that straightforward. In most cases, you’ll end up increasing paperwork and hassles, and potentially even paying more in taxes.
When might you consider hiring your spouse through your business?
While there may be legitimate benefits to having your spouse work for your business, it’s usually not about tax savings. It could be about:
Needing help in your business and your spouse being in a good position to provide that help or needing a job. You’ll see below that it may still not make sense to actually hire them in this situation, rather than just ask them for their help.
You want to fund retirement accounts for your spouse, and they don’t have access to retirement accounts through their work (or they are a stay at home spouse). This could be a reason to hire them, but you’ll have to see if the lemon is worth the squeeze here, as you’ll pay a lot in payroll taxes in order to pay them enough to substantially fund a retirement account.
If you’re trying to increase their access to or size of Social Security benefits, there may be a benefit. But remember that your spouse also has access to Medicare and Social Security benefits through your work history, so you’ll want to make sure there’s actually a benefit, since they can get full Medicare benefits through your work history, and half of what you qualify for through Social Security. So unless they’re going to qualify for more than 50% of what your Social Security benefit is, it likely won’t make sense to do it for this reason.
Why is employing your children for tax advantages different from paying your husband or wife through your business?
Many people are familiar with the concept of paying your children through their businesses. There are several benefits to this. It can be a write-off for the business, thus reducing taxable income in your tax bracket, while depending on the structure of your business and the amount you pay, the children may not owe taxes at all, or owe very little in taxes. Additionally, giving children the ability to fund their Roth accounts at an early age, which can result in decades of tax free growth.
However, your spouse is typically going to be in the same tax bracket as you. By paying them as a W2 employee, those wages are going to go out one pocket and into the other, but on your tax form, they’re going to equal out. Self employed taxes will need to be paid no matter what.
What payroll taxes have to be paid to your spouse, and why does this not result in lower taxes paid?
This will depend on a number of factors, but remember that for every dollar paid through W2, there are several payroll taxes due, including:
Social Security taxes
Medicare taxes
Potentially state unemployment taxes
Potentially other employment related taxes on a state or local level (disability, etc)
In a best case scenario, you are both paying the same Social Security and Medicare taxes. While federal unemployment taxes are typically not required for a spouse, if your state mandates other taxes for employees, you may still have to pay state unemployment taxes or for other state and local programs or requirements if you run this money through payroll as opposed to claiming it on your business tax return.
Additionally, if you’ve already filled your bucket for Social Security taxes up to the required annual amount through your income, you may be paying extra Social Security taxes by running that money through your spouse’s payroll. Similarly, if you are an S corporation, you only pay payroll taxes on the amount you set your salary to, and take the rest as a distribution. However, if you pay a portion of that remainder to your spouse, you’ll be paying payroll taxes, including Medicare taxes, on that amount as well.
As you can see, it’d be hard to see a situation where you’re actually saving money in taxes by paying your spouse through payroll.
But what if I pay them as a 1099 contractor and not an employee? Then I wouldn’t have payroll taxes
Assuming you are filing jointly and your spouse is in the same tax bracket as you, you’d both have to pay the same self-employed taxes on that income. In fact, you may lose out on additional deductions you could make through your business, such as the QBI deduction or the ability to contribute more to your self-employed retirement accounts since the businesses income would be proportionately reduced.
What about the benefits for my spouse with Social Security or retirement accounts, or other self-employed deductions?
It is true that your spouse would now have the ability to have self-employed income, and take related benefits. Ultimately, you’ll have to see if there’s truly enough of a benefit for the lemon to justify the squeeze.
Also we alluded to above, the Social Security and/or retirement account benefits may not be as valuable as you think. You’ll have to do the math and consult with your accountant and/or financial advisor to decide what’s right for your family.
Remember that you can take many of the other deductions related to self-employed income (home office deduction, etc.) for your household through the tax return either way.
Learn more about the tax benefits of 1099 income.
So, is there any way to take advantage of your spouse helping out with your business from a tax or monetary standpoint?
There may be fringe benefits you can take if your spouse helps out your business, even if they’re not being paid as W2 employees. If they are working as a bona fide employee that’s truly providing the business with services, they may be eligible for non-cash compensation benefits. These are tax advantaged because you can deduct them from the business, but your spouse may not have to pay taxes on the value of them.
It’s important to run this by your accountant as there may be nuances with state and local laws, or because of the structure of your entity. However, some things you may be able to offer to them include:
Health insurance
Life insurance
Expenses for things that help them to do the job, such as a laptop or phone
Meals and snacks
Special occasion tickets or gifts (that are reasonably priced)
Job related education
PSG Resource
What does it take for your spouse to qualify as a bona fide employee?
They can’t be a co-owner in the business
They have to do real work that you can track and prove (recording this is a good idea)
Their compensation is reasonable for the work they perform
They work under your control and direction
Again, there may be other nuances depending on your specific situation, so it’s important to check with your accountant. Some rules for reimbursement for health related benefits, for example, are different for S-corporations.
Conclusion
Many doctors falsely assume that there are substantial tax advantages to hiring their spouse through a W2 employed position. However, in most cases, when you pay your spouse W2 wages, you’re basically moving the income from one portion of your tax return to another portion for the same taxes. In a worst case, you’re potentially even introducing more taxes than you would have paid if you had run that income through your business. Therefore, even if your spouse is legitimately helping you with your business, in most cases it’s best to stick with fringe benefits allowed to bona fide employees rather than paying them cash wages.
Additional tax resources for self-employed physicians
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