Hiring Spouse

If your spouse does real work in the business, payroll could be a hidden lever. In the right setup, paying a spouse can unlock a second retirement bucket and a meaningful new deduction.

Key numbers

What changes when you hire your spouse

If your spouse does real work for the business, putting them on payroll can be one of the most straightforward ways to increase your total tax-advantaged savings.

Here's what changes when you hire your spouse through the S-Corp:

1. A second 401(k) bucket opens up. Each W-2 employee can make their own Solo 401(k) contributions. If you're already maxing your own bucket — $24,500 employee deferral plus $37,500 employer match on a $150,000 salary — your spouse gets their own separate bucket. At an $80,000 salary for legitimate work, that's $24,500 employee deferral plus a $20,000 employer match (25% of $80,000), for $44,500 more in tax-sheltered retirement savings. Combined, the family is now sheltering over $100,000 a year.
2. The spouse's salary is a business deduction. The $80,000 salary reduces the S-Corp's net income dollar for dollar. At a combined marginal rate of roughly 44%, that deduction saves about $35,000 in taxes — before accounting for retirement contributions.
3. The HSA expands to the family limit. If the spouse is covered under a high-deductible health plan through the business, you can contribute the family HSA maximum of $8,750 instead of the individual $4,400. That's an extra $4,350 in triple-tax-free savings.

The costs and watch-outs

The main cost is payroll taxes. The business pays employer-side payroll taxes on the spouse's salary — 7.65% on top of wages, plus any state payroll obligations. On an $80,000 salary, that's roughly $6,100 in additional payroll costs. That's real money, but it's a fraction of what the deductions and retirement contributions save.

The IRS scrutinizes spousal employment when the work isn't documented. The spouse needs to do actual work that's appropriate for their compensation — that's the same standard as any employee. Keep records: a job description, time logs, and a written employment agreement. Pay them through the normal payroll system on the same schedule as any other employee.

The optimal spouse salary depends on how much work they actually do and how much you can reasonably justify, but also on how much you want to contribute to their 401(k). It's a modeling exercise that's worth running with your CPA, because the numbers often look surprisingly good.