Your spouse just might offer some great skills and motivation to help you succeed in the dental practice. If a spouse is hired for any role in the practice, there are always key considerations to make first. Make sure the roles are clearly defined to your spouse and your staff and the spouse is respected and treated like every other employee – as a team player with key contributions. If your dental practice performance also happens to place you in the top tax bracket, it makes great financial sense to hire your spouse if you carefully analyze the opportunity and amount.
Boost Your 401K by 36%.
Essentially, adding your spouse to the payroll gives you the opportunity to double your family’s 401K contributions, saves you a little in taxes, and distributes office for which you might otherwise have to pay another employee or outside contractor. Every employee of your practice can contribute up to $18,000 of earnings to his or her 401K plan. The practice can match that contribution, up to 6% of the employee’s salary. But the practice can only match a 401K contribution on the first $265,000 of earnings, so your annual contribution is limited to $33,900:
Employee contribution = 18,000
Matching contribution = 265,000 x 6% = 15,900
Total = 18,000 + 15,900 = $33,900
When you hire your spouse for $20,000 a year—assuming he or she doesn’t participate in another retirement plan—you can add another $19,200 to your family’s annual 401k contribution:
Employee contribution = 18,000
Matching contribution = 20,000 x 6% = 1,200
Total = 18,000 + 1,200 = $19,200
Congratulations! You’ve just increased your annual pre-tax 401k contribution by 36%, simply by diverting $20,000 of your practice’s earnings into a salary for your spouse. Not only do you strengthen your retirement savings—you cut your tax bill as well.
Why $20,000 is Perfect. Two words—payroll taxes.
If your practice is an S-corporation, you can pay yourself as much as you want without payroll taxes. You do have to pay payroll taxes on every employee, even if you’re married to one of them. Payroll taxes on $20,000 - 7.65% paid as employer with an equal amount withheld—come to just over $3,000. Meanwhile, you save nearly $7,500 in income tax on your spouse’s 401K contribution, so you come out almost $4,500 ahead.
But . . . the higher the salary is raised, the more the payroll taxes cut into your income tax savings, shown here:
Rather than paying your spouse more than $20,000, add any additional earnings to your own salary, where they won’t be subject to payroll taxes. Additional areas of opportunity in the practice that might be addressed by an employed Spouse:
· Coordinate marketing efforts
· Manage social media
· Schedule patients
· Follow up with patients for billing
· Schedule repairs and maintenance
· Plan office events and parties
· Office Janitorial and Cleaning
· File patient documents
· File insurance claims
· Bookkeeping to assist your CPA.
· Enter payroll to assist your payroll provider
Make sure your spouse has a job description written in your employee manual just like everyone else. Be careful when it comes time to transition the office as your Valuation Analyst might advise an “add back” to increase the salary in the Spouse role to accommodate the higher wage replacement incurred by the new Buyer. You can learn more about adjusted expenses in your P&L and how they’ll impact your transition in our blog here