Benefits of Adding Your Spouse to Payroll

In the past, we have covered the tax strategies of owning an S corporation verses other entity structures, how to create tax-free income by paying your children, and different strategies to lower your AGI. This post, however, we will be covering one of the lesser-known strategies of owning an S corporation. More specifically, owning an S corporation and adding your spouse to payroll.

 

Social Security Benefits

Today, double income households (when each spouse earns an income) are very common. However, not all households have two incomes. Aside from not having the second source of income, the spouse who does not work may also find that their social security benefits are reduced, which can put a damper on their retirement. While you can plan and save for retirement, you can’t plan for everything, and social security benefits are a good safety net to have if the worst were to happen. 
One solution to this potential problem is to put them on the payroll of your business. In this way, they will pay into the social security system and increase their “credits”, which can help ensure that they max out their benefits in retirement. Please note, they don’t need to be an owner in the entity to be placed on payroll.

Increase 401(k) Contribution Limits

You may know that as an independent contractor, you can contribute as much as $53,000 into a 401k each year! While this is more than enough for many taxpayers, some of you are SUPER savers who want to set aside even more than the $53,000/year. Adding your spouse to the payroll is one way to do so.

By placing your spouse on the payroll, they would be able to contribute up to $18,000 into a 401(k) account, along with employer’s contributions of 25% of their gross income. Let’s say you maxed out your $53k. By adding your spouse to the payroll, your household could contribute an additional $23,000, for a total of $76,000! Let’s look at the numbers:
If you paid your spouse $20,000, they could contribute $18,000 as an employee contribution to their 401k. Then, the employer match of 25% x $20,000 would allow an additional contribution of $5,000 for a total of $23,000.

It is also important to remember that this is all a tax deductible expense. By paying your spouse, you are eliminating the income from your business and pushing it to your spouse. Also, because contributions to your 401k are not taxed, there is no remaining taxable income. That is a HUGE amount eliminated from your taxable income! All with the added benefit of allowing your spouse to contribute to Social Security.

At Independent Contractor Tax Advisors, we tirelessly search for every benefit and tax strategy available to you, the client. With a dedicated team of tax experts, and clear tax strategies established, you are certain to save thousands in taxes. Contact us today for a free tax consultation with one of our dedicated tax advisors.

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Tags: corp to corp