Watch This Video Before Putting Your Spouse On Payroll...

They still get a Social Security benefit. That's half of what your benefit was. Even if they didn't work one day.

And even if you get divorced, they're still going to get that. Even if you die, they're still going to get that.

Now here's another thing you can still do with your spouse without having them on payroll.

They still feel compensated, but you didn't put it on a W2. They're on the board. You're covering all these other expenses. It's a win, win, win. What do you feel is your best, most safe investment?

Welcome, everyone, to the Main Street Business Podcast. This is Matt Sorenson, joined by the insatiable Mark J. Coler. Insatiable.

I love these new adjectives you've been playing around with the source.

Insatiable. Yeah, it's a great one.

Okay, I'll use that.

Look it up, folks. Look it up, folks.

Look it up.

You just can't get enough of them. That's what it is. Mark Choi, caller. He just. It's insatiable. You just can't get enough of it.

Well, thank you so much. Well, thanks everybody for being here. This is going to be a great show today. We're really excited about this. For those of you out there that are married, sorry, you saw in the title, should I pay my spouse or not? Well, some of you are like, of course not. And others are like, I sure should. Yeah, damn straight. And then all those single people are like, I don't care. So some of you might be headed a dinner party if you're not married and want to learn this. There's actually a lot of incredible insights that you have to have on this topic.

Yeah. And one of the most common questions for business owners, when they're starting up a new business or as they're growing, their spouse is involved, they're kind of on the sidelines. They're there day to day. There's all these different factors here, but this is a very, very common question and one that has some tax and financial ramifications. So we want to make sure we cover it. So, you know, the scenarios we. When should I add them? We want to break down a number of misconceptions, too. There's a number of misconceptions about reasons to add them that we want to dispel. And then also we're going to hit the scenarios of like, definitely add them in these scenarios.

Yeah.

This is when you do want to actually add them.

Totally. And I know some of you are shocked. You're like, well, of Course you should, because they need Social Security or this or that. So we're going to break down a lot of misconceptions because a lot of people think the answer is non debatable. And I will point this out for the end of this. There are some ways from a political standpoint, when you're in a marriage and it's a partnership and there's no way it's not, your spouse is not involved in the business. We're going to talk about board of directors and how you can compensate your spouse so that he or she feels that they're being fairly compensated for the wear and tear on them and the family and you and. And so they do need to be compensated, but putting them on payroll is really what we're talking about. We'll give you some ideas on how to do most effectively.

Yeah, well, should we talk about why you may not want to add them?

That's the first thing right out of the gate here.

Because it's like adding them on payroll means you're also going to be paying in to fica. So if I'm like, well, I'm going to pay my spouse 50k. Oh, are you? Okay. You know, you're paying into Medicare, Social Security as the employer, you know, the business is going to pay that. And oh, your spouse, by the way, too, there's going to get half of that withheld too, on their paycheck as the employee. So that 50k adding them on payroll is going to actually cost you 15% on both sides of it, which is.

What is that? Well, you're going to be.

That's a lot of money. That's.

And what I wanted to say, I was going to start doing the math. It's more than that. You've got suta, state unemployment, futa, federal unemployment. You may not even. She or he may not even be exempt from workers comp. So now you've got all these additional payroll costs that are going to kick in and if you add them as a W2 on your company.

And because let me say this too, because you could otherwise just take that 50k that you would pay your spouse. Right. And just take it in the business as profit. I didn't have to pay that into Medicare or Social Security or unemployment or add them to workers comp.

Yeah, I mean, maybe we're assuming, folks, you know this, that if you don't pay your spouse of 50, you're going to take a draw of 50,000 and it's going to go into your joint marital bank account or as out as marital property, essentially. So whether you take the 50 into your personal account or you pay your spouse the 50, the money's going to end up at the end of the day in the same bank account on the same 1040, which we're going to come to here. But you're. What you're avoiding are the. All those payroll costs of putting them on payroll. Okay, so that's. That's, number one, why you don't want to do it is that first. Number two, is there really a write off? I mean, I get a write off, I guess.

Yeah, you can write it off. Right?

That.

Okay, let's say you paid your spouse that 50K, all right? You paid some taxes on it for the Medicare and Social Security and all the other stuff we just mentioned here. But you're like, yeah, but I got a $50,000 deduction, Matt, because that was wages. $50,000 deduction?

Yeah. You don't pay tax on that. Yeah. Oh, I'm sorry. You're married. Don't you file a joint 1040.

There's a W2 that's going to pop up, it's going to hit your 1040, and that 50k is coming right back.

Yeah. And you're like, well, we're married filing separate. Okay. By the time you do the math on married filing separate, it's cheaper to do a joint return and you're going to pick up the 50k as well. So you're back to where you started. You just moved 50 grand from the right pocket to the left pocket, and it's still in your jeans. You still got the money there.

That's how the IRS sees it. Either pocket or tax in it.

Yeah. If you get divorced, that's how the divorce judge sees it.

Both pockets, actually.

Yeah, it's all in the jeans. Yeah, it's all in the jeans. It's not in the banana stand.

Rest of development, fans, you know what

we're talking about now. Here's the big reveal. The. The big reason why you don't need to do this or want to do it because you don't want to do it to pay the fica, but you think you need to because your spouse is going to want Social Security. And I guess that's true. If you don't pay him, they don't get Social Security. Another that's myth.

Let's bust that right now. Okay. This is also, you know, we. We good fans of mythbusters. Whatever happened to that show, by the way?

Well, I had like nine seasons. I think I just ran out of myths to bust.

All right, let's bust a myth here.

Okay?

The nice thing about Social Security is there's something called a spousal benefit. So if you have a spouse who is non working, or maybe they're a little more part time, they've been a homemaker, they've raised kids, whatever, doesn't matter the scenario here, they can get what's called the spousal benefit of Social Security, which means they get half of the benefit you'd be entitled to. You still get your full Social Security benefit, but they still get a Social Security benefit that's half of what your benefit was. Even if they didn't work one day, they're still going to get that.

And even if you get divorced, they're still going to get that. Even if you die, they're still going to get that. When Social Security was established, this is well over 50 years ago or more, they put in this provision to protect the stay at home mom. Back in the day when it was more traditional, but now it's the stay at home dad or the stay at home mom. Either way, that spouse that's taking care of the household, we're not working full time or paying in enough. They may have a part time job, but they just didn't pay in enough. The government said, whoa, whoa, we're going to give you the spousal benefit. Whether you they die or get divorced or whatever, you're going to be okay. And so it was a protection mechanism. So you don't need to put them on payroll.

Yeah, I have so many clients, they're like, well, I just want to give them something so that they get some Social Security. So I want to pay them 30 grand a year, 50k here and it's like, okay, and you're taking 100k a year or more, Their spousal benefit is automatically going to be way more than what you're dropping in here to try and add them on payroll. So don't worry, do not do it for Social Security benefits. They're going to get it already. That benefit is almost always going to be more than if you started paying them out of the business. Definitely going to be more once you factor in the Social Security costs because you do actually pay in to get that non spousal benefit. That spouse almost kind of like this, like little free ride that they can get.

Actually. Now, before we tell you, I think if I can steer this our outline a little bit, I have an idea. Instead of talking about why you do put them on payroll, let's Stay with this for a minute. Why we don't put them on payroll. And what are some of the other ways we can benefit them? What are some ways we can solve this? Then we're going to circle back at the end and say now here's when we put them on payroll. So the one thing that I do think you can do is that. All right. Yeah.

Yeah.

Okay.

I would say we have an outline here. And Mark's telling me he's deviating.

I'm deviating.

Pivoting.

I call it pivoting. I talk, I call it improving the show. It's called Audible Omaha. All right, so if you're not going to put on payroll, what other things can you do? Well, the first one I love is the board of directors. The board of directors or board of advisors option, we've talked about it over and over again on the show is that every small business should be building a board of advisors, board of directors. And it creates better asset protection. It helps you better manage your business. And, and it creates write offs when you travel or dine with your board of directors and your spouse better be on it. It's just, it's a great method to. For travel through the holidays, travel in the summers. And, and you've said this before, a spouse, they are an advisor. I mean almost as their most quintessential role.

Yeah, you can't help it. I mean I'm this kind of the stresses of business ownership and being an entrepreneur. I mean, who's the most reliable person to talk about that with your spouse? You already are doing this. I can't imagine many. I mean I do that, you know, I know you do. Like we, we all have this person that's a partner in our life and your business as a business owner is such a key role in that they're kind of in this advisory role. Now there are some spouses that really do work in the business.

We're going to come to when you have to put them on, we'll come back. So.

And that. And I. We're going to hit that. I know here in a second. But so, but I'm just saying at a minimum we know that they're in this advisory role, whether it's a board of directors or board of advisors where they are formally on like the written business documents, they're expensing some of the stuff that are involved with them as they're participating in the business. We're catching those deductions. Now here's another thing you can still do with your spouse without having them on payroll, you can actually still make a Roth IRA contribution for your spouse even though they don't have their own earned income. Because that's another thing a lot of clients will say is, well, Matt, they're. They have to have earned income. My spouse has to have a W2 and have earned income themselves in order to make a Roth IRA contribution for themselves. I want to drop 7k in myself, but I want to do 7k for my spouse as well. So I'm going to give them a W2 for 7K.

No, don't have to.

Don't have to. Right. Another myth spousal contribution rule that says the non working spouse can attribute income of the working spouse to make a contribution to their ira.

Yeah. And this is similar to our conversations that passed on the show about paying kids. See, kids have to have their own earned income. So you have to go through that formal process of paying the kids in order to justify their Roth contribution of seven grand. But with your spouse, not necessary. Again, another benefit of the marriage, spousal ira. Beautiful. Beautiful. But here's the thing. There's ways to compensate your spouse without putting them on payroll. And to close this out before we talk about why you do put them on payroll is, and I alluded to this at the beginning, is you can compensate them through your draw. That if there's a kind of a political thing going on where they feel like, what the hell, I want to get paid, say, okay, it'll be in your account every month through our draw. It's our draw. It's our marital income. And so it can. So if you're going to take a draw of ten grand a month, just take five of it and put it in your spouse's personal account, too. It's going to be attributed to you is the draw. And so they still feel compensated. But you didn't put it on a W2. They're on the board. You're covering all these other expenses. It's a win, win, win.

Mm.

But there are those times where the W2 needs to come out.

Yeah. And we like adding spouses on payroll for a couple of reasons. The number one reason I will do it with my clients is they have a solo 401k or some maybe 401k plan for the business in general.

Yeah, it could be a. Yeah, it

could be group or other. They have other employees, too, and they want to make a contribution for the spouse. Like, Matt, we already did the 7k to the Roth IRA. We want to drop more in. I want to be able to do the 23, the 69,000. And I want to really start socking money away. I've got my own 69k I can do for myself. But you're telling me if I add my spouse onto payroll, I could do another 69,000 in solo 401k contributions for them? Yes, that's possible. Now you need to pay them. We're assuming you're making good money here in the business where you can get maximum retirement account contributions. And this is 401ks. There's no spousal contribution rule like we talked about in IRAs for 401ks. So they will need to get a W2 to do their own 401k contribution.

Yeah. No, what Matt, some of you. What Matt just said may have flown over your head. That is super deep. I'm going to powerful. You're very accurate. I'm going to break that into two parts. If your spouse. Sorry, if you have a solo 401k and you're both making enough money to really double down on the 401k, that. And you have that solo. That's where Matt's talking about being up to a $60,000 range or whatever. It could only happen in a solo. And what you're now doing is grossing up your spouse's payroll so that he or she can really throw down in the 401k. Now, let me point out something here. This is after you did the Roth. See, if you're already funding the Roth IRA and you both put in seven grand, hey, 14 grand in savings, that. That's pretty good. But some people are like, hey, we had a great year in the business. We want to open a solo 401k and throw down another 23 each and maybe even more with this backdoor strategy. That's the first thing Matt said. But when you have a group or a Safe harbor for 1K plan because you have other employees, well, you say, well, I can't do the solo, you know, so we're not going to do it. Well, you can still add your spouse to payroll and they could do 23,000. So now they're doing seven in Roth and 23 in a 401k. That could be Roth as well. Now you're dumping 30 grand into your 401k and in your spouse's 401k. That. And that could be the. Again, the 60 you're referring to is combined. Yeah, but there's. There's really the solo where it's even more with this backdoor Strategy. And then you've got the 223s. I don't know. I may have made it more complex. I don't know.

Well, I mean, if. If I really want to get a lot of retirement dollars in, because I do have the clients that are like, matt, dude, I want as much Roth dollars as possible. And now in the Roth solo case, you can do 69,000 of entirely Roth money. And there's a reason to do that, because if I get a little nest egg of 69, 70k, let's say that I can grow substantially tax free. Now I'm off to the races. And we've got the clients that have the 10, 100 million plus Roth accounts here. And so in those scenarios, I'm like, all right, let's pay you enough to max out even the 69k. I'm gonna go past just the 23. I want to do 69k, because starting this is last year, this is new. The all of the contributions into a solo 401k can be Roth now.

Yeah, I'm going to just run the numbers here for fun on this. And let's say you do that for 10 years. You say, hey, the business is strong enough. Now I'm going to gross up my spouse's payroll. Oh, my word. Are you kidding me? That couldn't be right. Oh, my word. Am I. If my math is right here on my investment calculator, 69,000. I start, and then I'm going to continue nine more years, and I'm going to put. And I'm going to get 8% and I'm going to compound it annually and put in an additional. Oh, here we go, 69,000 every year. You'll have a million dollars of roth money in 10 years. So you start right now, you put in 69 grand, and you keep your spouse on payroll for just nine more years doing this. $69,000 a year in Roth. At the end of those 10 years, you'll have a million dollars, tax free. And for people, a married couple that are in their 40s or 50s, and they're like, we don't have much retirement set aside. Yeah, this is where you lock it down. And both of you could do this now. You got 2 million in Roth money.

Yes. And this is. We have so many clients that are small business owners, self employed, and they're like, no one set up a 401k for me, man. I'm 45. I don't have a 401k anywhere. I didn't work at a corporation. That had a match and everything. It's all been on me. We're like, the solution is the solo kick. It's frickin awesome. It's for you. Small business owner with no employees.

I want to say another thing about this.

And you can get a lot of money in.

Yeah.

Not just 7k a year like an IRA.

Totally. And what's so important about this is. I'm guilty of this. Is that the normal business owner. And if I, if I ask any of you, you guys listening here that are a business owner on the podcast, let me ask you a question. What do you feel is your best, most safe investment? You. You. Right, your business, your business, you put it right back into your business. And I've done that for years. I. And I was talking to a good farmer friend of mine up in Idaho. He's got thousands of acres of potatoes and he was saying, mark, look around. I've got these huge potato sheds where we put millions of potatoes every year. And look at all my trucks and look at all my equipment. He goes, guess how much I have in my 401k? $50,000. After all this, he's my age, he's in his 50s, and he was like, I blew it. I put all my money back into the farm, all my money into trucks and barns and buildings and all this. And he goes, I'm scared to death. If there's a problem with my farm, I don't have any other bucket of money. And I could have been doing this every year for the last 10 years. And so the point being here is, you may go, well, 69,000 was a lot of money to put away every year for my spouse or even myself. Yeah, but didn't you put 69,000 back into your business? Couldn't you pulled 69,000 out of your business and maybe put it in a different bucket? That's what we're talking about.

Yeah, I know it's so hard because it's like, but man, I can that 69k, I can make 200k more next year if I do that, you know? And I think that's the thing where you gotta be very intentional about reinvesting and growing your business is like, what is the return on investment in my business? Is this really gonna pay off next year? And I know it's tough and we're all stressed with this. I think one of the things to do is just be. Maybe be a little measured. If you're like, matt, things are tight and I've gotta keep reinvesting just to Stay competitive. Yeah, Then maybe you are like, I'm like, then just do the 7k in a Roth IRA every year. And maybe you got to do backdoor because you're high income. But the ones that do feel behind, and this is kind of the ones I do run into that are like in their later 40s. And we were talking about the people in their 40s and 50s that are the business owners that don't have this. They're making good money for the most part. They're, they've. And they might have upped their lifestyle a little bit too. And I can say you're a little guilty on that too. I know you've reinvested in your business, but you, you've upped your lifestyle too. Now's the time to start catching up with that. It is not too late if you think about investing this account for another 20 years. I know you just did 10 years if you're 50.

Oh my gosh.

You don't even get Medicare until you're 66, folks. Okay, so like you've got 16 years there. So a lot of times we're talking about even a 20 year horizon to keep investing and growing this money. So maybe it's only half of that. You're dropping 30k a year in. It's reasonable to do. Oh, now we're getting on a tangent here.

No, we're not. I don't think this is the tangent. Because when we say don't put your spouse on payroll for these other reasons, but do put them on payroll for this reason. This is a big reason.

This is numeral one, this is.

And I'm going to just throw this out too. Here's what's going on in some of your heads. Listening. Yeah, Mark, that's nice, Matt, great idea. But I can take that 69,000 and go buy a rental property. Okay. And Mark. Matt, that rental property is going to make me a 20% ROI with mortgage pay down. You listen to our podcast last week, right? Mortgage pay down.

I wonder where you're going with this appreciation.

You know where I'm going.

I'm wondering.

You wonder? I don't know. You are. You're in trouble. Mortgage pay down, appreciation, cash flow. I'm going to take that 69 and go buy a rental. Oh, really? Oh, now you know. Yeah, Go buy a rental in your Roth IRA. Take the 69 freaking grand, put it into the Roth 401K and Roth IRA and go buy a rental in the retirement account. Remember that little tip that we talk about all the Time here. So you saw it coming down. I know you like a truck. Yeah. So the point is don't so many Americans think well yeah, I could put that money back in my business or I could go buy a rental property and get a 20% rate of return but put it in a 401k. Sucks because I just have Wall Street. No you don't. Get ready to have your brain blown. Same math right here in my calculator. 69,000. I did an 8% rate of return. So you say you can do 20% with a rental property. We're going to put 20% on this and I'm going to do it in my retirement account. Buckle up. What do you think it's going to

be ready a lot more.

$2 million. I did a 20% return buying a rental property with my Roth did the same nine years after the initial contribution of 69,000. Now I have $2,078,000 tax free my Roth IRA because I put my spouse on payroll and redeployed the money in the right way.

I mean sign me up, you know and that here's the interesting thing on the numbers I'm seeing the calculator too. Here is in the initial example at 8% rate of return. It was more of that million was actually what you put in. It was about 600k.

That's right.

Total contribution of what you put in is what's left there. You still got about 400k of investment growth when we up the rate of return there same same time horizon. Now the vast majority of that money is investment growth. Your money's working more for you which makes sense as your rate of return gets higher. But this is one thing on the solo 401k or Roth IRAs in general is a lot of business owners and even our real estate investor clients. I'm grouping you in here too that also haven't had retirement accounts because you thought I can just do real estate and get a better rate of return. Yes. Do it in your retirement account too. I'm not saying don't do real estate, just saying use the additional tool of the retirement account. And so but this is a reason why we like adding a spouse for a W2 is it gives more ability to make more contributions, get more money in to start building this other nest. Stake a lot of business owners. Yeah. Your business can have value. Hopefully you've grown it and scaled it. You got a team where you could actually sell this business. It's not just you and the business is going to die when you retire, but there could be some value in the business. But let's make sure we're peeling this other bucket aside so you're not like stressed out like the farmer in Idaho. That's like if five guys isn't buying fries anymore, I'm host.

It's crazy. Okay, now we're going to give you one last reason why you. Well, we'll give you two of why you should and then have to. Another reason why you could or should put your spouse on payroll is, is for a healthcare strategy. It's called the health reimbursement arrangement. It works in a marriage situation where you can cover your spouse and all their medical of them and their dependents, which includes you. So in your typical S corporation, you're not going to be able to write off your medical expenses. You can write off the insurance, but all the co pays, the deductibles, the dentists, the eyes, the chiropractic, whatever. You can't write that off in your S corp. But if you set up an HRA for your spouse through a support company, we can write it off. Now that's a chapter in my book, the Tax and legal Playbook. We've had podcasts on that. But that putting the spouse on payroll and it doesn't even actually require a W2 but you're going to go through a pay function and it's called the hra. But then there's times you have to.

Yeah, and there is the scenario where you have to. Let's say you do have the business where you guys are both working every day in the office or at the storefront or on the job site, whatever it may be like this is their full time job. They need to be on payroll. You actually don't have a choice. But we do know so many families when there's a spouse involved is their role is more. They might have their own job or their own business even or running the household, but they are still into this advisory function to you, the business owner really working on running that business every day. And so we know we, we at least have that. And that's where we're saying don't chase putting them on payroll unless you're thinking about the solo K or the HRA strategy. We love it for those reasons because those are going to save you taxes and help you build wealth. But if they are actually working in the business, they need to be on payroll. You don't have a choice. I'm sorry.

Yeah, yeah. It's called materially participating and it's a must. But then you can open up these other opportunities in the process, so. Well, everybody, like I said at the beginning, this is really actually interesting topic with a lot of twists and turns. Hopefully this has been helpful. Love being here with you. And please continue to share this podcast with your friends and family. Give us a five star. It allows other people to discover this little hidden gem out there on the airwaves and appreciate all of you. And appreciate you, Matt. Great, great insights today. You look great today.

Thanks. I know we did a little red and blue today. I mean, a little.

Yeah, we're just patriotic.

Yeah, we got Fourth of July coming up. We're just trying to get.

Yeah, this is the patriotic show.

Damn straight it is.

Actually, this is going to be coming out on the 4th of July week, so we went red and blue. You know, we. We planned it. See, we should just. We could have just played into that. We gave away our opportunity to show some forethought and planning, but, oh, well,

everybody listen to this podcast know we do not plan.

Yeah. We couldn't do better than that.

Yeah. Right.

We're shoot for that. All right, well, thanks, everybody. See you next week and enjoy the Fourth of July holiday. Be safe. And make sure you do not hold the firecracker while you light the fuse. Be careful. See you next time.