Is there any benefits to paying your spouse a salary under your own LLC?

Question

I just created an LLC for my rental property, so this is all new to me.  Is there any reason to pay a salary to my spouse?  If I pay her, to make this simple let's say $2k a month, she'll pay taxes on that which means it's my money which I've already been taxed on so in essence I'm getting taxed twice.  Or is this all a write off so her being taxed breaks even?  Or can she sign up for a 401k and put 100% of it in there?  
Suggestions and thoughts?

Jeff N. · Answer

If she is not a member of the LLC then one disadvantage of not having her on payroll would be no stated income.

You will not be taxed twice since it is a payroll expense for your LLC.  But you may be responsible for your share of unemployment tax, Social security tax, workers comp, state and county employment tax, etc, for this employee.

Chet Mazur · Answer

Why form an LLC? If it's just liability protection my $1M umbrella policy costs me ~$250/yr which is less than the minimum franchise tax board tax of 800/yr, SE tax exposure for yourself, etc.

Also, it maybe a disregard entity (single member llc), which means it's all reported on one's 1040 schedule C.

I learned all of this the hard way

David Beard · Answer

Just to clarify, simply using an LLC does not create SE tax exposure.  SE taxes are triggered by an active business (such as flipping, brokerage, etc.).  Holding real estate for investment does not trigger SE tax (except for a new medicare tax surcharge that may be coming soon for the extremely affluent).

Mitch Kronowit · Answer

Well, I guess that just demonstrates how subjective the tax code truly is. I didn't pull this idea out of my behind, I heard it from my attorney, who has his 4 kids working for his company, and it was backed up by my CPA, a relatively conservative fellow, who has told me numerous times it was improper to take some of the deductions I know a few of my friends are taking based on their CPA's advice. But there's nothing wrong with playing it overly safe either. Thanks for your input.

Chet Mazur · Answer

advice of CPA and atty. It's a red flag for sure.

Dave Toelkes · Answer

Jim,

LLCs have members or partners, not stockholders.  LLCs do not issue stock.  Referring to the original question, Adam's LLC holds rental property and is a rental activity.

If the LLC is a single member LLC (a sole proprietorship), it does not file a tax return in its own right.  Instead, all the income and expenses would be passed through to Adam's personal 1040,   Adam would report the rental income and expenses on Schedule E (not Schedule C) and his net rental income would be taxed as ordinary income at his marginal tax bracket rate.

Adam,

I am assuming that you are a new rental property owner.  Does your rental activity generate taxable income, or, do you have a net passive loss for the year once the depreciation expense is taken?  Maybe you have not even filed your first income tax return that includes your rental, so you don't know yet.

If you have a net passive loss for the year, then you are already sheltering all your rental income and there is no need to create another tax advantaged vehicle that would just consume some of your income in maintenance fees.

If you have a net rental income, then hiring your wife could make sense if you are in one of the higher tax brackets.    If the salary you are paying your wife is dontributed to her Traditional IRA, you avoid the ordinary income tax that you would have paid on that money. Remember that payroll taxes are 15.3%, so if you are the 25% tax bracket or higher, hiring your wife and paying her a reasonable salary for the work she would perform might save you both some taxes in the short run.

However, if you are looking at a Traditional IRA, or a 401k, you won't save any taxes in the long run as your contributions are eventually taxed at whatever marginal tax bracket you are in when the money is withdrawn

The pitfall here is that you can not put your wife (or your kids) on the payroll and then pay a salary that is exorbitant for the work performed.

This is a good question to explore with your CPA.

Jim S · Answer

There are many issues to consider:
1- do you file as jointly or single?
2- who are members of the LLC? just you or your wife too? If your wife is a stock holder then you might want to partially pay yourself and totally pay your wife in quarterly dividends. These long term gains are taxed at 15% vs your normal tax rate or 28%? They have to be paid out equally to all stockholders. Good for tax planning, not good for securing loans based on salary.
3- most company 401Ks are pretax so it is worth maxing them out if you do not need the $$ for a long time. 401Ks are kind of complicated and there is a lot more to them then wandering into Schwab and setting on up. If you do not use a payroll service, it is probably not worth the effort.
4- Maybe getting creative and buying a vehicle thru the LLC would be one of the best ways to take money out. There are some minor implications but well worth the time as it is money that you won't have to pay personal taxes on before you access it.

Mitch Kronowit · Answer

No, but if something catastrophic occurred at one of my rentals and there was a loss of life, I highly doubt the damages sought in the lawsuit would be limited to my net worth. Is $1 million in liability enough? $5 million? I don't know. Who here has been sued before for a tort?

Some option.

Is this based on your knowledge of the tax laws or just an opinion? If it's illegal, I'll bring it up with my attorney and CPA right away.

Chet Mazur · Answer

assuming the cost of insurance is linear for the $800 FTB tax, you could likely get ~4M of coverage.. Do you really have 5M of assets to protect? There is the BK option as well. I would be more concerned about doing something silly like paying your kids a salary, or having the LLC as the trustee of a trust (which is frequently pierced in court) or not paying taxes and having the entity shield pierced.

As for war story, I was audited for 04 and 05 and the proposed tax and penalty was >500K.. The return was prepared by a CPA, and I followed all his suggestions... Some fancy dancing later (and several IRS errors), and I escaped w/ just some interest due. Representing myself in tax court was kinda fun...

Big issue was not treating entity as a disregard & using a K-1 rather than schedule c. and Sched C v. E.

I'm not using that CPA any more.

If I was starting over, I would be a sole-pro, and have a ton of insurance.

Mitch Kronowit · Answer

As to the poster's original question, I don't see much advantage either because, as others have stated, an LLC is basically a "pass-through" entity, so even though you get to take a deduction for your spouse's salary, you have to add that income right back in, if filing jointly, resulting in a wash.

However, if you have children under age 18, you can pay them as employees of your LLC. The IRS ignores the first $6,000 or so per year of income made by a minor, but your company still gets to take the deduction for paying them.

Check with your CPA. It's all perfectly legal, but your kids must honestly perform work for your company, even if it's simply your 5 year-old emptying your home office's wastepaper baskets or your 15 year-old teenage computer whiz maintaining your web site. I plan on doing the same, hiring my daughter, in a couple of years when she's old enough to follow directions. Right now, she suffers from a severe case of selective hearing.  ;-)

Is there any benefits to paying your spouse a salary under your own LLC?

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