Why Hiring Your Spouse Is (Probably) a Bad Idea (Even If Hiring Your Kids Is Not)

By Dr. Jim Dahle, WCI Founder

I hear plenty of doctors talk about or ask about hiring their spouse. The idea out there is that there is some huge tax break available by hiring your spouse to do some sort of trivial work for your business (schedule your shifts as a hospitalist?). Today, I want to disabuse you of that notion.

What Are the Benefits of Hiring Your Spouse?

It's not like there aren't good reasons to hire your spouse. Let's go through those first.

#1 You Need the Help

Sometimes, your business just gets overwhelmed. You need help. Hiring and training a new staff member takes time. Your spouse is smart and hard-working and cares more about the success of your business than anybody you could possibly hire. Fine. Hire your spouse. While you'll lose the benefits of whatever your spouse was doing before they came to work for you, you'll gain back whatever you would have paid someone else to do that work your spouse is now doing. Honestly, though, you ought to give serious consideration to just having them volunteer their time in the business. You'll probably come out ahead.

#2 Your Spouse Can Increase Their Social Security Benefit

Maybe your spouse doesn't yet have their 40 quarters to qualify for their own Social Security benefit. Or perhaps they're still way below the first bend point in Social Security and having some more Social Security earnings could dramatically increase their eventual benefit. That might be a reason for your formerly stay-at-home spouse to do some paid work. That doesn't mean they have to work for you, of course, but see #1 above. If you need help and they're the best person for the job (or they work cheaper than anyone else), go for it.

#3 You Can Make a 401(k) Contribution for Them

If your spouse has earned income and your business offers a 401(k), they can put some (or sometimes just about all) of their earned income into that 401(k), providing an additional upfront tax break in the tax-deferred subaccount and the usual benefits of retirement accounts no matter what subaccount you use.

More information here:

Can I Hire My Spouse as an Employee?

Why Hiring Your Spouse Is Dumb

Let's get to the main point of this post. For most doctors, hiring your spouse is dumb. Downright stupid. The benefits simply do not outweigh the costs. What are the costs? To start with, there are the costs and hassles of employment. You've got to fill out an I-9, W-2, W-3, and W-4. Employment contracts. Time cards. Your spouse is a legitimate employee, and you need to treat them as such.

However, the main cost is the additional payroll taxes. Let's say you make $400,000 a year. For some reason, you decide you want to hire your spouse and pay them $100,000 of that $400,000 a year. The Social Security Wage Limit (above which you do not pay Social Security tax) is $176,100 for 2025. That means that when you were making $400,000, you only paid Social Security taxes (12.4% for the self-employed, although half of that is a business deduction) on the first $176,100 of that $400,000. However, if you pay your spouse $100,000, you're not just paying Social Security taxes on $176,100; now, you're paying it on $276,100 of that $400,000.

12.4% * $100,000 = $12,400.

That's a lot of money. Same household income. More tax. See the problem? It can be even worse if you've set yourself up as an S Corp. Let's say you're an S Corp and you're paying yourself a salary of $200,000. Now, you only pay Medicare tax (2.9% for the self-employed although half of that is deductible as a business expense) on the first $200,000. If you hire your spouse for $100,000, you're not only paying an extra $12,400 in Social Security taxes, but you're also paying an extra $2,900 ($15,300 total) in Medicare tax.

The worst part about paying all of these extra taxes is that your spouse may not be getting much, if any, benefit for paying them. Your spouse can qualify for full Medicare benefits without ever working, simply based on your work record. And if your spouse's Social Security benefit is less than 1/2 of yours (very common in one-doctor households, particularly when there has been a stay-at-home spouse for many years), there's no additional benefit to paying all of those additional Social Security taxes. Your spouse will simply opt to receive 1/2 of your benefit instead of their own. Even if you die young, your spouse will simply get your full benefit rather than their own.

But what about the benefits of that retirement account? Yes, retirement accounts are great places to invest. But with reasonable assumptions, the benefits can be calculated, and they have a limit. Let's say you pay your 48-year-old spouse $100,000. How much can they put into the 401(k)? In 2025, they can put in their $23,500 employee benefit. Then, they can put in close to another $20,000 as an employer benefit. This assumes that your spouse is your only employee and you're using a solo 401(k). If you have other employees and an ERISA 401(k), that's probably going to be a lower amount.

At best, you're going to contribute something like $43,000 in tax-deferred dollars. Your immediate tax break on that $43,000 (you're probably in the 24% tax bracket) is going to be $10,320. That's less than the $12,400-$15,300 you're paying in additional payroll taxes. You know what's worse, though? You're only deferring the tax on that $43,000, not eliminating it. But the additional payroll taxes? They're gone forever. So, maybe you get an arbitrage on that tax rate. Maybe it goes in saving 24%, but it comes out at an average of 15%. Your real tax savings there is $43,000 * (24%-15%) = $3,870. That's not even close to $12,400.

Yes, there is some benefit in the tax-protected growth of a 401(k). Yes, there is some benefit in the asset protection and estate planning features of the 401(k). But it's not enough to make up for paying an extra $8,000+ in payroll taxes you didn't have to pay and which won't be providing much, if any, benefit to you. Even if you get a customized solo 401(k) and do the Mega Backdoor Roth IRA process for your spouse (and thus get the total contribution up to $70,000), it still isn't going to pencil out for most physician families.

Can I Hire My Spouse as a Contractor?

But what if you hire your spouse as an independent contractor? Does that somehow change the equation? Not really. Somebody still has to pay those payroll taxes. Does it really matter to your family if your business pays them or your spouse's new business? Same cost either way. It doesn't really help you avoid the ERISA-related issues with your employees either (i.e. have to include the spouse's 401(k) contributions when doing non-discrimination testing) since the businesses will be considered “a controlled group” unless they meet all of these exceptions:

• Each spouse owns nothing in the other’s company;
• Neither spouse is a director, employee, or management participant in the other’s company;
• The companies do not derive more than half of their income from royalties, rents, dividends, interest, and annuities; and
• There is no limitation or restriction on either spouse’s ability to sell his or her company that runs in favor of the other spouse or their minor children.

You also, of course, have the usual issue of the IRS not looking fondly at businesses that pretend their employees are independent contractors.

The bottom line is that yes, you can hire your spouse as an independent contractor, but no, it's probably not the brilliant tax move that you thought it was.

More information here:

Why I Gave My Business Away; Pros and Cons of Adding Spouse to LLC

Why Hiring Your (Minor) Kids Still Makes Sense

Just because hiring your spouse is probably dumb, hiring your kids is not. The main issue here is making sure your kids are actually doing legitimate work and paying them a legitimate wage to do it. You can't pay them $400 an hour to feed charts into a shredder or do a crummy job sweeping the floor. You still have to do all that paperwork (I-9, W-2, W-3, W-4, employment contract, time card), but the tax benefits are awesome.

If your business is a sole proprietorship or partnership (or an LLC taxed as a sole proprietorship or partnership) and the only owners are their parent(s), minor children don't pay payroll taxes. Plus, they almost surely won't have enough earned income to owe income taxes ($15,000 in 2025). But since it is earned income, it can all go into a Roth IRA and never be taxed again. That's triple tax-free and pretty awesome. Heck, it might even be better than an HSA (depending on whether your HSA is funded via employer withholding). Maybe we should call it quadruple tax-free.

The bottom line is that if you're looking for a big tax break, hire your kids instead of your spouse.

What do you think? Have you hired your spouse? Why or why not? How did it pencil out for you? 

The post Why Hiring Your Spouse Is (Probably) a Bad Idea (Even If Hiring Your Kids Is Not) appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.