Put Wife on Payroll?

Jan 12, 2023 / By Elaine Floyd, CFP®

In financial planning it is common to employ family members for various tax or other benefits. A child who has earned income can contribute to an IRA, for example. So a parent who owns a business may put the child on the payroll in order to make them eligible for IRA contributions.

In Social Security we often talk about putting the wife on the payroll in order to qualify her for Social Security benefits. (Excuse the stereotypical sexist language, but it usually is the husband who runs the business and the wife who has low or no earnings for Social Security.) There’s a whole analysis that goes into this: will paying the wife—and paying SE taxes on her earnings—qualify her for a benefit that is higher than the spousal benefit she would get as a nonworking spouse?

We examine this question in this newsletter, Put Wife on Payroll. In the example we used, it did not make sense to pay SE taxes for ten years in order to qualify the wife for her own benefit. However, under other circumstances it might.

Nowhere in this analysis—nor in any situation where a client is considering hiring a family member—do we ponder the moral aspects of doing so. At least not in any of the financial-planning materials I’ve read. It’s taken as a given that this is strictly a numbers analysis.

I was reminded recently that putting a spouse on the payroll for Social Security purposes could be seen as unethical. In the sentence handed down to Allen Weisselberg, former CFO of the Trump Organization who was convicted of a series of financial crimes, the judge specifically cited the $6,000 Weisselberg paid to his wife for the purpose of padding her Social Security earnings record as his reason for maximizing the sentence to the extent that he could. (The 5-month sentence was limited by a previous agreement that called for Weisselberg to plead guilty to 15 separate criminal charges and also testify against Trump.)

The judge said, “Were it not because I made that promise, I would not be imposing a five-month sentence. I would be imposing a much greater sentence. Most significantly was the $6,000 payroll payment to Mr. Weisselberg’s wife and the reason I find that so offensive is that it was driven purely by greed.” Despite Weisselberg’s seven-figure salary, he still “found a way” to make sure that his wife received sufficient payroll income so she could “one day benefit from Social Security payments she was not entitled to.”

Of course, it’s possible the wife actually did some work in the business. And it could be argued that a wife who takes care of home and family should be entitled to Social Security benefits based on her own work, not half the amount based on her husband’s work. In fact, there have been proposals to credit for the Social Security earnings record the hours a caretaker spends in caregiving. (So far, there’s been no action in Congress.) The point is, these moral judgments are not always so cut-and-dried. There are several ways of looking at any given situation.

Speaking of Trump, interestingly, his recently released tax returns show no Social Security income. I’ll leave it to you to speculate on his motives for not claiming his Social Security benefits (and denying Melania and Barron their dependent benefits).

Read more about the Weisselberg sentence here.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.


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