Owning an online business has a sort of “gravitational” effect on marriages. Your spouse tends to get pulled into the orbit of the business. This can be a tremendous support to the spouse who started and runs the business. And all that extra support often helps an online business grow a lot faster.
As a couple, it’s important to make sure that both spouses are being rewarded for the time and effort they put into the business. For some couples, the best way to accomplish that is to put the other spouse on the payroll. If you and your sweetie are considering this issue, here are five things to think about:
#1: There are benefits besides just earning money.
When your spouse is a paid employee of the business, they will pay social security taxes, which allows them to draw from social security at retirement age based on these earnings. Another benefit is that there are fringe benefits that the spouse can take advantage of (retirement, health, etc). In other words, your spouse earns more than just a paycheck.
Nobody likes to think about this, but it’s worth saying–if the marriage should end and the spouse wasn’t on payroll, they will suffer in the area of social security benefits as well as employment history when trying to obtain another job elsewhere. Putting your spouse on payroll in your online business can be a way of assuring them of security and respect as an individual. (Which, you know, goes a long way toward making sure the marriage doesn’t end.)
#2: There are drawbacks.
One disadvantage of putting your spouse on payroll is that social security taxes will be deducted and paid for on your spouse's wages. With a spouse working in the business, sometimes allowing only one spouse to draw payroll minimizes social security taxes paid up front, while the social security benefits later aren't minimized much (and not at the same degree).
#3: The question of which spouse is the “owner” and who is the “employee” comes down to what makes the most sense for you as a couple.
When it comes to deciding which spouse legally “owns” the company, and which one is the paid employee, there are a lot of individual factors that come into play. Your best bet is to consult your tax advisor and let them give you the information you need to make the decision. In most cases, the payee spouse would be the one that is most involved in the business, and the individual that would be capped out on social security if that is applicable. However, it doesn’t have to be one or the other. Both spouses can actually both be employees of the business, if that makes the most sense.
#4: It’s an emotional decision…and that’s okay.
When both partners are working in the business, both need to feel like they are being adequately rewarded for their efforts. For some couples we’ve worked with, raising the “owner” spouse’s salary felt like a win for both of them—having there be just one wage earner in the family results in fewer taxes taken out of the wages, which benefited them more at retirement age. For other couples, the spouse working in the company needed the individual validation as well as the financial rewards that came with a wage.
#5: The paperwork for setting up your spouse on payroll is minimal.
No special forms or filings to deal with! All you need to do is fill out a W4 form and decide on a pay structure. (Usually a set salary is easiest.) After that, the “employee” spouse can be added to the process and start getting a paycheck. (We highly recommend taking your new “employee” out for a celebratory dinner.)
The Bottom Line
The choice of whether to set your spouse up as an “employee” in the online business is a highly personal one. There’s no right or wrong answer. Like all issues in a marriage, you just need to communicate clearly about what works the best for each of you, and best supports your shared goals. Along with consulting your financial advisor, you can learn a lot more about this topic from tax accountant/author Mark Kohler, CPA.