I have a safe harbor 401K + profit sharing plan set up at my office.
I’m assuming that this is a no brainer. Should I put my wife on payroll and defer the $16,500 to her retirement plan? This is the 1st year that she hasn’t worked for another company and had her own plan with matching from her previous employer. I have a 4% match for those who choose to participate. Then of course the profit sharing portion to add at the end of the year if cash is good.
And I’m also assuming that I still pay the payroll tax on this amount.
Treat her like you would any other employee. If audited you better be able to show “reasonable” wage for her work.
So what would a “reasonable” wage be for a bookkeeper? She’s an accountant but not a CPA–she does everything except tax filing for the office (she does budget, monthly cash flow analysis, marketing ROI, etc). I would think 15-20K would be considered “reasonable” but that sounds very subjective.
To add to our concerns, here’s a recent tax court case related to a self-employed medical reimbursement plan… this case hits the point as to how careful you really need to be when simply putting any family member on payroll:
Income Tax—Sole Proprietor’s Medical Reimbursement Plan: A sole proprietorship can sponsor (and deduct payments to) a medical expense reimbursement plan that provides family coverage for its employees, including the proprietor’s spouse. However, the Tax Court previously disallowed the deduction where the spouse had been doing the same work for several years without compensation, then was paid $100 a month plus medical benefits for her duties in a later year. The Tax Court reasoned that (1) her payment of medical expenses simply relieved her husband of his obligation under Kansas law to pay for her medical expenses, and (2) she obtained no economic benefit from checks written from the couple’s joint checking account because she was an equal owner of the funds in the account. The 10th Circuit has now vacated this decision and remanded (returned) the case to the Tax Court to consider whether or not the spouse was a bona fide employee, starting with a consideration of the common law worker classification factors. Shellito v. Comm., 108 AFTR 2d 2011-XXXX (10th Cir.).
Thanks for the heads up and research Tim!
I think I’m fine in this regard b/c this is her 1st year that she’s not being employed full time in the corporate world. She has made around 5-7K/yr on my payroll to date and that was working full time at an outside business. So now that she’s working around 1000 hrs/year with me, I think I can justify a $20K salary.
You bring up some great information which says to me that I need to fully document everything in case of an audit. However, I don’t require any time sheets or clocking in/out of any of my employees so I won’t have that information if the IRS asks anyway. Problem there or not?
It shouldn’t be a problem with the IRS since you don’t require it for any employee. Trouble may arise if you ever have another employee clock in or out or somehow tracks their hours and you have NO support for a family employee.
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