Have you already made the maximum contribution to your 401(k) plan but wish you could contribute more? Then consider adding your spouse as an employee to allow for additional contributions.
Adding an employee typically creates complications and limitations to retirement account contributions, however spouses do not count as a second employee for these purposes.
Before adding your spouse to payroll, he or she should not have any other meaningful employment, should provide some basic administrative functions to justify compensation, and should have a written job description.
The wages paid to your spouse will depend on the amount of 401(k) contribution you desire. Assuming the maximum contribution of $57,000 (or $63,500 for those 50 and older) is your goal, wages will need to be grossed up by 7.65% to allow for payroll tax withholding. The following formula can be used to calculate the minimum amount of wages needed.
Maximum contribution of $19,500 / 0.9235 = $21,116 of wages. If your spouse is age 50 or older, the maximum contribution will be $6,500 higher and the calculation will look like this: $26,000 / 0.9235 = $28,154. If your goal is not to make the maximum contribution, then the formula will still work to calculate a lesser amount.
The main drawback to adding your spouse as an employee is the added payroll tax expense, which between the employer’s and employee’s portions equals 15.3%. However, the employer’s portion of the payroll taxes will be a tax-deductible expense, as will the wages paid. We can run the numbers and help you decide when you should add your spouse as an employee.
If you can save well beyond the 401(k) maximum for two people, then another strategy involving a Defined Benefit Plan may be more appropriate.
Creating another account for tax-deferred, long-term growth should be part of your retirement savings strategy. Our experts can help you decide which savings strategy will work best for your unique situation.
