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Self-employed Issues
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Re: Self-employed hiring a spouse

Compensating a spouse so she can max out the salary deferrals allowed through a SIMPLE IRA or a Solo 401k is a great thing to do. To set yourself up as an employer, you don't need to form an entity. There are many sole proprietors out there who employ a staff.

For starters, all you need to do is file a Form SS-4 with the IRS to obtain an EIN for your sole proprietorship. Assuming you'll be compensating your spouse a fair wage for the business services provided, you will then begin to compensate her through payroll.

Please note that there are monthly, quarterly, and annual filings and payments that you will need to learn about if you will be handling the payroll yourself. You will also need to sign on with your state to report the wages where necessary.

And don't forget to contact your insurance agent about obtaining worker's compensation insurance. In Massachusetts, it's generally illegal to have anyone on payroll without first having worker's comp in place.

Finally, if you put your spouse on payroll, and offer her a SIMPLE IRA, that will become the retirement plan for your sole proprietorship, and you will not be able to contribute to the SEP too. This may make a Solo 401k a more attractive options, since your wife can max out the allowable salary deferrals, and you can still contribute an equivalent amount into a retirement account for yourself as previously allowed by a SEP. You can set up a Solo 401k if your only employee is your spouse.

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