When Should You Pay Your Spouse and Kids?

• May 13, 2016
• Paul Neiffer

My father was 47 when I was born (I am the oldest of three kids) and he elected to start receiving social security at age 62 (when I was 15).  When a person elects to take social security benefits before full retirement age, there is a limit on how much you can earn before you have to start paying the benefits back.

In my father’s case, this was a very low number and this forced my parents to defer quite a bit of crop sales for over three years until my dad turned age 65 and could make as much as he wanted without having to pay any benefits back.  My mother was the accountant in the family and had owned farmland before marriage.  She was very active in the operations.   Additionally, my brother and I did quite a bit of work during the summer and after school during fall and spring planting.  My father should have compensated my mother, brother and I for all of this work.  By paying these wages, he could have sold more of the grain to offset the wages and the family would have been better off than deferring grain sales.

During these three years, my father’s income from farming would have been under the FICA wage base so paying wages to my mother would not have created any additional payroll tax liability.  Since my brother and I were under age 18 (and actually knew how to operate a combine and tractor), all of these wages would have been deductible and not subject to payroll taxes and it is likely that my brother and I would owe no income tax either.

Here are certain situations where you should either pay the spouse or the kids:

• If you are under the FICA wage base and need to keep income down for social security purposes (age 62 to full retirement age);
• Kids under age 18 for a sole proprietor should always pay wages to kids that perform work (up to $6,300 should be tax-free to the kid);
• To maximize profit-sharing benefits (a husband can put away $24,000 into a 401k plan (over age 49) and he can put $24,000 or more for his spouse with slightly more than a $26,000 salary);
• Certain tax-free fringe benefits require a salary to the spouse (make sure to be in compliance with ACA rules);
• To get under certain adjusted gross income (AGI) limitations (in some cases, a payment to your kids will allow additional deductions or credits to you).

There are likely several others, but the key is make sure to compensate your spouse and kids appropriately.

Paul Neiffer, CPA

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