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Should I put My Spouse on Payroll?

Whether or not to put your spouse on the payroll for tax planning purposes is a very strategic question and something we often analyze for clients. In fact, many clients rush to put their spouse on payroll, but for the wrong reasons. It could actually be quite a costly mistake. 

Two reasons why NOT to put your Spouse on a Payroll

First, here are two big reasons NOT to put your spouse on payroll. These are actually common mistakes or misconceptions on why one may put cut the non-working spouse a check. 

Misconception #1- So the non-working spouse can contribute to an IRA – Wrong. A non-working spouse does not have to have a ‘paycheck’ in order to contribute to a traditional or Roth IRA. The non-working spouse can create what’s called a Spousal IRA. There are really only two requirements. One, the working spouse has eligible compensation that’s at least as much as the total contribution to both IRAs. Two, they file a joint income tax return. Bottom line, don’t cut a paycheck to simply fund an IRA or Roth IRA.

Misconception #2- To get a Social Security benefit for the non-working spouse – Wrong. On the face of it, this would seem logical, right?  However, a “non-working spouse” of a “working spouse” already qualifies for spousal benefits. The benefits are limited to 50% of the working spouse’s primary insurance amount, but to get more than that amount a ‘non-working spouse’ may need to pay into the system for years. Thus, going on payroll may not get the ‘non-working spouse’ more than they were already going to get! Speak with a financial advisor that understands Social Security planning to run the “numbers” before cutting another payroll check. I cover this topic in-depth and dedicate an entire chapter to this strategy in my book with Randy Luebke: “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You”.

A Spouse is Always Working for the Business

As a preliminary matter, I always believe it’s a misconception that the spouse is considered ‘non-working’. A spouse is always an integral part of a business…no doubt about it. The spouse should also be serving on the Board of Advisors or Directors for the company.

A spouse would presumably be constantly involved in the operations of the company. Thus, a salary would always be justified and appropriate IF it makes sense for tax planning.

Good Reason #1 – Maximize the Spouse’s 401k contribution

If a business owner and their spouse want to put away some big money for retirement, they may qualify for the Solo 401k. If so, BOTH spouses need to be on payroll AND for the proper amount to max out the 401k match. There’s even the option for an incredible ‘next level’ strategy referred to as the “Mega Back-Door Roth”.

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In 2024 the primary business owner and their spouse can EACH contribute up to $22,500 (or $30,000 if 50 or older) into a 401k. The business is allowed to take a tax deduction for the W-2. Neither spouse has to claim the contribution as income on their 1040 (if a traditional contribution and not a Roth). 

Yes…there is some FICA or payroll tax due on the W-2 amount for each spouse in order to ‘fund’ the 401k, but the ultimate tax benefit is significant due to the ‘time value of money’ and building a tax-deferred retirement account. Typically, it’s customary to  ‘gross-up’ the payroll amount on the spouse to cover the FICA taxes. Then ‘zero out’ the rest with the contribution to the 401k.

401k Contribution Examples

This is an incredible opportunity for the spouse of a business owner. The spouse can create and fund a 401k with a net taxable income of zero! But it gets better!! In addition to the deferral the spouse could make from their paycheck, the company can also do a match on the total payroll amount to the spouse. This would further be a deduction for the company and add to the spouse’s 401k balance.

EXAMPLE #1: If your spouse is under age 50, the payroll amount would be approximately $22,198, with a net pay of $20,500. Then the spouse would elect to ‘defer’ or contribute $20,500 to the 401k, and the W-2 nets out at zero (assuming a Traditional contribution and not Roth). The company would ALSO be able to contribute 25% of the spouse’s payroll into their account of $5,549. The company would have a total tax deduction of $27,748, and the spouse would end up with $26,049 in their 401k!

EXAMPLE #2: If your spouse is age 50 or older, the payroll would be approximately $29,237, with a net pay of $27,000. Then the spouse would elect to ‘defer’ or contribute $27,000 to the 401k, and the W-2 nets out at zero (assuming a Traditional contribution and not Roth). The company would ALSO be able to contribute 25% of the spouse’s payroll into their account of $7,309. The company would have a total tax deduction of $36,546, and the spouse would end up with $34,309 in their 401k!

In fact, if a business owner and spouse can afford to pay a little more in taxes, they can get even more creative. They can fund a ROTH 401k and create tax-free accounts, rather than just deferring taxes until the future. 

Good Reason #2 – Potentially Write off More Medical Expenses

Essentially, if your family has a lot of medical costs, put your spouse on the payroll. It may allow you to utilize the Health Reimbursement Arrangement (HRA).  However, keep in mind that you would have to utilize a sister management company (typically a Sole-Proprietorship). 

It’s important to note that the HRA strategy is impossible for a business owner to use with their S-Corporation without the use of the Sole-Prop. The reason being is the “greater than 2% shareholder rules” that prevent a business owner (or their spouse) from deducting certain fringe benefits for themselves (this includes the HRA).

However, the ‘backdoor strategy’, is to create a ‘support’ or ‘management’ company that would hire the spouse for services provided to the main company, and under this employment relationship provide for an HRA. 

On the face of it, the HRA may sound complicated or expensive, but it is rather quite simple and affordable. It is ‘self-administered’ without the need for an insurance company or bank’s involvement. See “How an HRA can Save you Thousands when facing extra Health Care Costs”.

The beauty of the HRA plan being provided through an employment arrangement is that the payroll may be minimal, OR it can be used in conjunction with a larger payroll amount and a 401k contribution. The cost is under $500 at our law firm KKOS Lawyers, or accounting firm K&E CPAs.

DRAWS…The Easy Solution

 Let’s look at this logically:

If you have a spouse, then you’re married.

If you’re married, there’s a 99% chance you’re filing a joint 1040.

If you’re filing a joint 1040, then the income from the business is taxed to both of you.

If the income is taxed to both of you, then ‘Distributions’ or ‘Draws’ to your spouse are treated as if they are distributions to you.

Give your spouse a freaking Distribution/Draw if they need money

Here is a visual representation of multiple options:

For illustration purposes only.

In Summary, the 401k contribution and the HRA are the only reasons I think business owners should consider having both a ‘non-working’ spouse on the payroll. Make sure to bring this up with your tax and financial advisor to apply these strategies to your particular situation. Schedule a consultation with one of our tax lawyers at KKOS Lawyers and within an hour they can explain and design the right ‘Comp’ structure for your spouse!

How to Maintain My S-Corporation

S-Corporation format can provide you with some amazing benefits, but if you don’t maintain it properly, you can have a lot of unexpected problems. 
I wish that it was as easy as just filing a form with the State. Then you have magical tax savings and bulletproof asset protection, but that’s simply not the case. In order to maintain an S-corporation it is more than that. 
The reality is that the tasks can be easy and fairly affordable. Here are the items to check off on your “to-do list” when it comes to maintaining your entity. You’ll truly reap some tax benefits and have a serious level of asset protection.
Here is Your ‘To-Do-List’ of 7 things to be Aware of if You Want to PROPERLY Maintain Your S-Corporation:
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1. Corporate Documents
Review your initial set-up and make sure you have all of the key components of a proper formation; i.e. Articles, Bylaws, Minutes, Stock Certificates, Corporate Seal, etc… Remember it’s not just ‘filing with the State’ that creates a proper entity. 
In fact, it’s surprising how many new clients I meet with that “think” they have an S-Corporation. Come to find out they never filed their S-Election (Form 2553) or they are out of compliance with the Secretary of State. This puts a major dagger into the heart of your S-Corporation Strategy.
2. Annual Minutes and Board Meetings
It’s easy and affordable to make sure you hold your annual Shareholder and Director meetings. It’s also a great write-off opportunity!! Along with that it’s critical for asset protection. Many people think that because I have an LLC ‘taxed as an S-Corp’ I can skip this important step. Don’t do it!!
If you haven’t done your ‘Minutes’ in a few years, all is not lost. Complete what we call a ‘clean up’ and get on a system. Check out our CMP program at KKOS Lawyers and let your Paralegals take care of the details.
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3. Annual State Secretary of State Filings
Every state has a different filing fee and procedure for renewing your S-Corporation each year. If you don’t complete this filing, your corporation can be involuntarily dissolved and now you have nothing. 
You default to operating as a sole-proprietorship and the IRS can even take issue with your tax filings and disallow your tax filing if you aren’t in good standing with the State.
4. Regular Operations and ‘Using the Name’
To ensure much stronger asset protection in the event of a lawsuit, get into the habit of using your corporate name on all of your legal documents, advertising material, website and certainly your business cards. Let the world know you have incorporated.
Also, if you want the asset protection of an S-Corporation you have to let your customers, vendors and contacts know that ‘your company’ is the one doing business. You are simply an officer and employee of the corporation.
5. Quarterly Payroll
Setting up your personal payroll procedure is the most critical aspect of owning and operating an S-Corporation to save taxes. 
This process includes making sure you have a proper payroll level established for you that is realistic and not to aggressive yet allows for maximum self-employment tax savings. Next, it requires that you file quarterly payroll reports and making deposits based on your particular situation.
The deposits vary based on the amount of your payroll. Choosing the proper payroll is absolutely critical.
Here is a diagram I have referred to as the “Kohler Payroll Matrix” over the years. This is an updated version since the passing of the Tax Cuts and Jobs Act effective in 2018, and can be a useful visual guide in determining the proper salary level in your S-Corporation from year to year.
You’ll see that I begin the diagram at $50,000 of net income and a 50 percent payroll allocation at that level. As such, when taking the operational costs of to maintain an S-Corporation into account, it typically doesn’t make sense to utilize the S-Corporation unless you’re making a net income of at least $40,000.
MOST IMPORTANTLY, note that determining the proper payroll for a business owner is not an absolute science. It’s a subjective analysis and this diagram is simply a ‘starting point’ or a ‘guide’ for S-Corporation owners to talk about with their tax professional. Nonetheless, I have found these boundaries to be sufficiently reasonable in discussions with IRS representatives when working with clients and their payroll allocation over the past 20 years.
6. Tax Return Filing
It’s well recognized that S-Corporations provide incredible audit protection. It is also estimated they are audited up to 15x less frequently than that of Sole-proprietorships. However, if you don’t file your tax returns on time and/or an extension, you will actually increase your chances of an audit dramatically and the penalties for late filing have gone through the roof. 
The required tax return is an 11020-S and is due by March 15th…UNLESS you file an Extension you have until September 15th to file the final return.
7. State Tax Filing Requirements
Every state is a little different when it comes to S-Corporation filing requirements. Some states are cheap and easy, others are expensive and complex, with of course everything in between. Familiarize yourself with your State’s rules and get set up on a system with your accounting professional.
Conclusion
Bottom line, the S-Corporation can be a powerful structure and tool to save on self-employment taxes. Additionally, it can protect a business owner’s personal assets from lawsuits that may arise from their operations. Keep in mind that all of this comes with an administrative cost.
Make sure you are familiar with your responsibilities as an owner of this incredible small business tool.

Do I Need a Living Trust?- What You Need to Know

If you own any type of real estate, including a personal residence, have children, own a business, have a retirement account, or even life insurance you need a Living Trust! Sound bold? It’s not…To state it simply, here’s why:
Why you Need a Living Trust:

Real estate – Even with a Will, if you don’t take proactive action you’re estate will end up in Probate Court in almost every State.
Children – Are your children, young or old, able to handle any assets you leave them? It’s not just who’s going to raise minor children. Can your older children handle the money dropped into their lap?
Business – Who’s going to run your business if you pass away? Who can make deposits, pay bills, and sell assets?
Retirement Account – Sure you can name a beneficiary inside your retirement account and avoid probate. Do you want them to get those funds all at once? Would it be better for them to receive some of those funds over time?
Life Insurance – Could your beneficiaries handle a big life insurance payout? Also, what if your spouse remarries…do you have a plan for dropping a big life insurance policy into their lap? Any strings?

A Revocable Living Trust solves all of the concerns above and much, much more!
Millions of Americans die each year without any type of estate plan in place, and this forces their families into the probate court system. Here they experience huge expenses with lawyers, court fees, and significant time delays when they would rather be mourning. Worse yet, without a plan…the State law will implement a plan for the distribution of their assets.
However, a Revocable Living Trust allows ANY American to ‘write the law’, and design the outcome and distribution of their assets upon their passing the way they feel is best for their beneficiaries.
What is a Revocable Living Trust?
A Revocable Living Trust is a unique document that’s part of an overall Estate Plan. It accomplishes so many incredible objectives it’s difficult to even list all of them. Here are just a few:

A Revocable Living Trust is a private document that you don’t with any State or the IRS. Moreover, more people are using a Trust with a unique or ambiguous name to hold their assets. This creates incredible privacy benefits while they are still alive.
You can create provisions in a Revocable Living Trust for your minor children or children that act like minors, that are far more creative and extensive than a Will. Consider giving your children financial support when they reach certain benchmarks, goals, or even a specific age. You can even hold money back or impose penalties. If a child’s life isn’t in order or not to your liking, change your Trust. I know…a little narcissistic, but it’s your money! Read more here “Creative Trust Provisions for Your Children“.
A Revocable Living Trust is administered by you during your life and by a Trustee that YOU choose upon your passing. This person, or company, will handle all of your assets the way YOU decide in advance. This can include what the Trustee invests in, when they sell assets, and when they distribute them to your beneficiaries.
If you have children with special needs and worry about their care when you’re gone a Revocable Living Trust. A Trust can create a structure with ‘special needs provisions’ to properly handle their finances when you’re gone. The Trust will appoint a guardian and terms that allow for continued State and Federal care in addition to the assets or income from the Trust.
Probate is a court process that can be extremely time-consuming and expensive. With a properly funded Revocable Living Trust you can avoid Probate entirely. A Revocable Living Trust is designed to allow your Successor Trustee to handle your affairs privately and without court involvement. However ‘funding the trust’ is the key! 
You can change your Trust any time you want while you’re alive. It’s a ‘Revocable’ Living Trust! If you get remarried, your kids tick you off, or you decide to completely restructure your entire estate, you can change your Trust however you want!
Over 57% of American households have a dog and over 35% own a cat (But do you really own that cat? – a topic for another article I’m sure). The real question is ‘who’ will be taking care of that pet when you’re gone? A Revocable Living Trust allows you to appoint a guardian for your pets and set aside money for the caretaker and the animal themselves. See “Estate Planning for your Pets.”

Moreover, don’t think a Revocable Living Trust is just for rich or old people either. Consider just a few of the reasons listed above and realize that a Revocable Living Trust is becoming more and more common for single AND married individuals, young or old, rich or poor, with or without children.
You’re not Alone
You can create a plan where the people you trust and love run your affairs upon your passing. If you become disabled you can also designate these same people to help you with your affairs. A Revocable Living Trust isn’t just there for you upon your passing, but while you’re alive and need help.
I get it, nobody wants to think about dying. Preparing for a disaster is important in every instance, AND dying with your assets disorganized could be just that: a disaster. In fact, more than 50 percent of Americans don’t even have a Will or any type of estate plan whatsoever.
Is a Will the simple answer for everyone? Absolutely not. If you take a little extra time and money to implement a Revocable Living Trust as part of a coordinated estate plan, it could save your family tons of time and thousands of dollars down the road.
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A Plan of Quality
It’s not just all about the Revocable Living Trust either. This type of trust is a part of an overall “Estate Plan.” A quality Plan should include the following and a number of ancillary documents:

Revocable Living Trust (the foundation of your Estate Plan)
A Will (to ‘pour’ any personal property into the Trust)
Powers of Attorney for Finances
Powers of Attorney for Health Care (to decide on doctors or procedures – not to “pull the plug”)
An Advance Medical Directive or Living Will (that’s the ‘pull the plug document’)
Funeral and Burial Instructions
A Directive for organ donation, final instructions, etc.

If you’re one of those millions of Americans that have put off your Estate Plan and are ready to get started putting your affairs in order, check out our Annual Estate Planning Special here.
If you just want to leave it to the courts, judges, fighting family members, and the blood-sucking lawyers (a quote from Jurassic Park), just keep doing what you’re doing.
However, we’re ready when you are to get started planning and implementing your Trifecta and Estate Plan. Give us a call at 435-586-9366 or check out the KKOS law firm here.