Hiring Wife (qualified joint venture? wife as IC?)

[sylvanthus]

Question for those in the know out there. This is probably confusing as hell so I apologize in advance and applaud anyone who can read through this.

I am looking at future possibilities so that the wife has some kind of retirement set-up since she is currently a stay at home mom and will be for some time. I will be working an ICU W2 job (initially part time, moving likely to fulltime in a year) and have a side LLC in washington state that I will use as moonlighting for ED positions.

I will be in a community property state (washington) so from what I understand I can use my LLC as a "qualified joint venture" and have my wife as a part owner and pay her a salary if she can show she works 500 hours per year in the business. Id have her doing scheduling, payroll, manage my CME, conferences, etc etc etc.

The other option is to hire her as an independent contractor and pay her a salary.

I'm considering both options as I want to be able to have her pay into social security so she can get benefits down the road and also possibly open up a solo 401k for her on top of my solo 401k, etc. I am also trying to maximize my pretax savings and drop my AGI as much as possible so I lower my IBR payments. The ultimate plan is PSLF for my loans, which my ICU position would qualify for, and I only will need 4 more years (finishing a 6 year residency/fellowship). I have a plan B which involves saving money on the side and if PSLF implodes I just take that money and pay my loans off.

Anyone do something like this? Its bloody complicated as hell and Im definitely going to meet with an accountant, financial planner etc.

Thoughts?

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[deleted245139]

Let me know how this goes... I'm curious myself. How much time will you be dedicating to the LLC/EM? Will she manage your cme and schedule for the PT/FT ICU gig, or just the LLC?
My wife stays at home too and I've been wondering how to do something like this.

Good luck with it man and congrats on the positions and set up!

 

[Hamhock]

I know you are asking primarily about tax-deductible retirement and "hiring" your wife.

...but I can't get past the "part time ICU" qualifying as "full time employment" for PSLF purposes. Will it be 30 hours per week?

HH

 

[sylvanthus]

I know you are asking primarily about tax-deductible retirement and "hiring" your wife.

...but I can't get past the "part time ICU" qualifying as "full time employment" for PSLF purposes. Will it be 30 hours per week?

HH

ICU will start part time and then move to fulltime in a year. Mostly taking the part time gig to get my foot in the door. The ICU is moving to a new hospital and doubling in size so they will definitely need more intensivists. My contract gives a sign on bonus when moving up to fulltime status also, so just have to wait a year.

In the meantime, ill be doing more ED shifts which oddly enough pays less per hour than the ICU. Thanks teamhealth for fukin up the region.

 

[sylvanthus]

Let me know how this goes... I'm curious myself. How much time will you be dedicating to the LLC/EM? Will she manage your cme and schedule for the PT/FT ICU gig, or just the LLC?
My wife stays at home too and I've been wondering how to do something like this.

Good luck with it man and congrats on the positions and set up!

First year will be 10 shifts in ED a month, then likely 3-4 the following year when I move to full time ICU.

In trying to figure out my wifes “job” but will likely just be the LLC ED gig.

 

[The White Coat Investor]

Question for those in the know out there. This is probably confusing as hell so I apologize in advance and applaud anyone who can read through this.

I am looking at future possibilities so that the wife has some kind of retirement set-up since she is currently a stay at home mom and will be for some time. I will be working an ICU W2 job (initially part time, moving likely to fulltime in a year) and have a side LLC in washington state that I will use as moonlighting for ED positions.

I will be in a community property state (washington) so from what I understand I can use my LLC as a "qualified joint venture" and have my wife as a part owner and pay her a salary if she can show she works 500 hours per year in the business. Id have her doing scheduling, payroll, manage my CME, conferences, etc etc etc.

The other option is to hire her as an independent contractor and pay her a salary.

I'm considering both options as I want to be able to have her pay into social security so she can get benefits down the road and also possibly open up a solo 401k for her on top of my solo 401k, etc. I am also trying to maximize my pretax savings and drop my AGI as much as possible so I lower my IBR payments. The ultimate plan is PSLF for my loans, which my ICU position would qualify for, and I only will need 4 more years (finishing a 6 year residency/fellowship). I have a plan B which involves saving money on the side and if PSLF implodes I just take that money and pay my loans off.

Anyone do something like this? Its bloody complicated as hell and Im definitely going to meet with an accountant, financial planner etc.

Thoughts?

My wife owns half my business. She also participates in our solo 401(k) and has acquired enough quarters to get social security. I think that's a lot easier than hiring her as an employee or contracting with her as an IC. Now we file as an S corp so she gets a salary too.

I don't know where you're pulling that 500 hour rule from. Never heard of that one. Nor do I know what being in a community property state has to do with anything. Just make her a second member of the LLC and have the agreement state that profits are split 50/50 (or however you want to split them.) Keep in mind that in the event of an audit you're going to have to explain her role in the business and they might have a problem with it if her answer is "I just book flights and write on the calendar once a week."

Bear in mind that the downside of doing this is not insignificant. You will pay a lot more in SS taxes than you would otherwise, especially if you want her to make enough to max out a solo 401(k). That means you guys will be paying an extra $132,900 * 12.4% = $16,479.60 in Social Security taxes you wouldn't otherwise be paying. That's going to wipe out a lot of the benefit of having another retirement account, especially since you'll have to pay some of that tax deduction back but all of the SS is gone forever since 50% of your benefit is probably still going to be more than her benefit. The additional PSLF forgiveness may add a little more benefit, but you'd have to calculate how much. Can't be a lot I wouldn't think.

Good luck with your choice. It's not the slam dunk no brainer you seem to think it is.

 

[sylvanthus]

My wife owns half my business. She also participates in our solo 401(k) and has acquired enough quarters to get social security. I think that's a lot easier than hiring her as an employee or contracting with her as an IC. Now we file as an S corp so she gets a salary too.

I don't know where you're pulling that 500 hour rule from. Never heard of that one. Nor do I know what being in a community property state has to do with anything. Just make her a second member of the LLC and have the agreement state that profits are split 50/50 (or however you want to split them.) Keep in mind that in the event of an audit you're going to have to explain her role in the business and they might have a problem with it if her answer is "I just book flights and write on the calendar once a week."

Bear in mind that the downside of doing this is not insignificant. You will pay a lot more in SS taxes than you would otherwise, especially if you want her to make enough to max out a solo 401(k). That means you guys will be paying an extra $132,900 * 12.4% = $16,479.60 in Social Security taxes you wouldn't otherwise be paying. That's going to wipe out a lot of the benefit of having another retirement account, especially since you'll have to pay some of that tax deduction back but all of the SS is gone forever since 50% of your benefit is probably still going to be more than her benefit. The additional PSLF forgiveness may add a little more benefit, but you'd have to calculate how much. Can't be a lot I wouldn't think.

Good luck with your choice. It's not the slam dunk no brainer you seem to think it is.

Oh I definitely don't think its a slam dunk and am fully aware how complex it all is, why I am asking questions so I don't make a stupid decision. The below is confusing as hell to me, so I am going to look into it more.


Regarding the community property state.

"Ordinarily, the qualification allows married owners to file tax returns not as a partnership but as joint sole proprietors, where both are entitled to Social Security benefits and credits. However, if the joint venture is incorporated as a legal entity -- such as an LLC -- under state law, the IRS qualification is not allowed and the venture is treated as a partnership unless the married joint venture owners live in a community property state."


Regarding the 500 hours.

"Any trade or business activity of a limited liability company (LLC) in which a member materially participates is not considered a passive activity. Material participation is a year-by-year determination, and a member meets the material participation standard if he or she is involved in the operations of the activity on a regular, continuous, and substantial basis.

According to Temp. Regs. Sec. 1.469-5T, a member is treated as materially participating in an activity if one of the following seven tests is met. The first four are objective tests based on the current year. The next two tests are based on participation in prior years, while the last one is a broad “facts and circumstances” test based on the statutory definition of material participation.

1. Hourly safe harbor: The member participates in the activity for more than 500 hours during the current year.
2. Primary participant: A member’s participation in the activity for the current year constitutes substantially all of the participation of all individuals in the activity (including individuals who are not owners of interests in the activity).
3. Maximum participant: A member participates in the activity for more than 100 hours during the current tax year, and this is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity).
4. Significant participation activity aggregation: The activity is a significant participation activity (SPA), and the member’s aggregate participation in all SPAs during the current year exceeds 500 hours. (An SPA, generally, is an activity in which the member participates for more than 100 hours during the year but which does not qualify as a material participation activity under any of the other six tests.)
5. Historical participation: The member materially participated in the activity for any five years (whether or not consecutive) during the 10 years immediately preceding the current year.
6. Personal service activity: The activity is a personal service activity (professions and trades in which capital is not an income-producing factor), and the member materially participated in the activity for any three years (whether or not consecutive) preceding the current year.
7. Facts and circumstances: If a member is not a material participant under tests 1–6, but based on all of the facts and circumstances the individual participates in the activity on a regular, continuous, and substantial basis during the year, then the member is considered to materially participate. The temporary regulations require the member to participate in the activity for at least 100 hours a year. However, the member’s time spent managing will not count toward the 100 hours if any person receives compensation for managing the activity and if any person spent more hours than the member managing the activity."

 

[precisiongraphic]

Once your wife has been married to you for 10 years or more, she is personally entitled to 1/2 your SS payout regardless of whether she ever worked one hour outside the home/for wages. This works whether or not the spouse is alive and regardless of marital status at the time someone qualifies for SS at 66 or whenever.

Paying her SS taxes as an employee are worthless once you've been married 10 years. Unless she's going to make $131,000 per year for 35 years to get over the SS maximum for full monthly SS payout on her own.

Maybe the 401K and other benefits will be worth it if she's an employee but making her eligible for SS is a poor use of funds.