Two and a half years ago when I started this blog I had a vision for what it would become. The original primary goal was to encourage readers to slide a chair around behind my desk and view the world from my side of the desk. I’ve always found the world interesting from my perch. Things I would never know or experience were front and center due to my position in the world. It all fascinated me.
Before long I expanded my vision. I wanted this blog to be a sort of personal journal to my children. When I’m gone (and hopefully while I’m still here) my girls can reference the thoughts of their dad. Some things are modified to protect the guilty (as I like to say), but the flavor is all there. Who and what I am is on these pages. This is the most real me I’ve ever presented. It took decades of writing, learning and growing to reach the point where I was comfortable exposing myself to the world. (Please disregard the indecent exposure.)
Tax professionals don’t always see the world as I do. My practice is small so I serve a discreet clientele. I actually sit with my clients periodically when things get real. I know about marriages on the rocks before the world at large. I consult with clients with a medical death sentence before even their family knows. Sometimes I even know before their spouse does. While it is interesting, it is never easy advising in these situations. How do you tell a client their child needs to be institutionalized to protect parent and child? How do you tell a wife she should or shouldn’t divorce her husband? How do you explain to a client she must tell her husband about the massive gambling losses she suffered and that they are bankrupt?
If I refuse to help it only gets worse. The client came to me and closed the door before she sat down because it is serious. Problems raising the kids and marriage issues are common. Financial and tax issues are front and center because finances (and sometimes taxes) are affected by their situation and any response they consider. I’m always uncomfortable advising clients on how to deal with their children; I’m nervous when advising a woman she should divorce her husband and report the abuse to the police. It breaks my heart when the patrol car is out front of the office as I help a client deal with a criminal issue.
When my world was confined mostly to the local market is one thing. Now this blog has spread my reach to the entire world and certainly the entire U.S. One of these difficult questions has come as a call from the dark and I’m scared. I’m scared no matter what I do people will be hurt. Even ignoring the echo from the abyss has consequences.
Voice From Over the Transom
These types of questions cropped up in consulting sessions over the last few years. I’ve consulted (and/or prepared taxes for) people on every continent, except Antarctica. (Anyone at the Amundsen-Scott South Pole Station need to talk to a friendly accountant to break up the monotony of the endless night? I’ll donate a free hour just for the opportunity to say I served every continent on the planet.) The level of personal questions generally is lower than from local clients because blog clients on the other side of the landmass are at a different place (metaphorically speaking). Until now.
About a dozen emails grace my inbox per day during the summer from readers (more around and during tax season). Some are congratulatory, showing appreciation and require little or no response. Some I can’t answer easily or right away so they linger in my inbox until I decide how to respond or it just gets too old and I let it pass. (I hate it when I do that and I do it too often.)
Then there are the emails I must answer and answer now. Sometimes readers contact me (clients, too) because it is a desperate situation. No response is a response and a bad one. The email I’m about to share approaches this level.
The email literally had a headline. I used it as the title of this post. I wanted to tweak it, but decided against it. Here is the email:
Dear Wealthy Accountant,
I found out about you listening to the ChooseFI series on YouTube. I had a question about my situation and was wondering if you had any advice. My partner and I are not married, but we live together, have a 5 year old and are expecting our second child. My SO (significant other) is self-employed as an artist and averages over 100k/annually and pays considerable taxes for it. My question is what is our best tactic for taxation, would we be better off getting married (even with me going back to school in the future) or should we keep our current situation and my SO “hire” me as an employee to help him with some administrative chores. I plan on staying home with our baby-on-the-way for 3-4 years. Thoughts?
At first I was going to send it to my assistant to recommend a consulting session where I get paid. The answers this woman was asking required more than a curt response and I felt there were serious personal risks to her if she got bad advice. Then I felt bad asking her for payment for such a personal issue.
I received her email in the early evening and decided to sleep on it before responding. The next morning I emailed back I wanted to write a blog post on her email, name excluded. She emailed agreement.
The reason for a full-blown post is because her question has similarities to many others I get. At first glance it seems she is asking tax questions. But the real question is revealed in her headline used as the title of this post. Her real question is: Should I marry the father of my children?
This is where I must weigh my words carefully. A living, breathing human being will listen to my words and take them seriously. This is the life of a man and woman. Two children are involved! No matter what I do will affect her decision.
I have no choice. The voice from the dark has become a plea. I cannot turn my back. I am honor and duty-bound to respond. There will be a price to an unnamed accountant as well.
The Easy Part
There is an easy and hard part to the request. I’ll do the easy part first because, well, it’s easier and this post is making me emotional. Besides, I tend to talk taxes when I’m avoiding the real issue.
The readers SO is an artist earning over $100,000 annually. I read that to mean somewhere between $100,000 and $150,000.
Our kind reader asks about taxes, but prefaces that with getting married. We’ll deal with marriage later.
According to the email, our reader’s SO is self-employed. YIKES! Of course he’s getting killed in taxes. As a sole proprietor, your SO is paying more tax than in any other part of the tax code. I can’t even cheat and trick my computer into getting his tax bill higher. Here is what I want you to do. (I’m talking to my email reader now. Please grab a chair, slide it behind my desk and observe.)
Without seeing the actual tax return, the probability is your SO should organize as an LLC and elect to be treated as an S corp. (Call my office if you want me to help you set this up.) This blog’s birth came about when I gave Mr. Money Mustache the same advice and I wrote about it here.
You never mentioned which state you come from. Each state has its own department handling LLCs and incorporations. There are fees involved. Some states (Texas, California, Delaware come to mind) have very high fees. Here is a little trick to save money. You don’t have to organize your LLC in your home state or where you live!
If the home state has reasonable fees you can have an attorney do the paperwork or set it up yourself. You act as your own registered agent. (LLCs and corporations need a registered agent to manage their filings. You must live in the state to manage the filings such as annual reports.)
If you reside in one of the high fee states, I have a solution. Wisconsin, where your favorite accountant resides, isn’t a high fee state! Since my practice is in Wisconsin I can act as your registered agent. After the initial organization setup costs, Wisconsin charges $25 annually, plus a $1 processing fee. If you use other online services to setup your LLC they automatically act as your registered agent. It’s where they make most of their money. They also charge $200 and up annually. Most are now over $300 per year, plus state fees. I’m such a nice man because my office charges $109 (at this time) and that includes the $26 Wisconsin wants.
There are two benefits if this appeals to you. First, you do NOT have to file a Wisconsin tax return; you’re not doing business here (unless you are from Wisconsin and I don’t know it). Second, a registered agent is where legal documents get delivered. If your SO gets sued, process service takes place at my office if the attorney follows the rules. This is important. If you are not available and the process server can’t deliver paperwork it is sent to the state. You could have a court date and miss it because you were unaware. You would lose by default and could be liable for the damages awarded in the suit. As registered agent, my office is open all normal business hours. My heart doesn’t flutter when the sheriff delivers paperwork, either. I only ask, “Who’s this one for?” Then I get my team on the horn and speed-dial you until we make contact. We also email and use other means to reach you. There are procedures to make sure the court is aware if you haven’t been made alerted to the suit.
You Are an Entity
Either my office or a local accountant can help you elect to treat your LLC as an S corp. This is important. As an S corp your SO gets a reasonable wage and the rest flows to his personal return without FICA/self-employment tax. This is a meaningful tax savings.
If he is not already doing so (and qualifies), an office in the home deduction is possible. Under new tax rules this can be more valuable than ever before with the standard deduction higher now. Your facts and circumstances will dictate.
Most important of all, he can super charge his retirement savings. The options are endless. This blog (and others) discuss a variety of retirement plan choices. If you tell me what your goals are and more details on your situation, I’ll tell you what you want. Once again, facts and circumstances prevail. And don’t believe what most blogs publish. You can pack away over $300,000 per year in a deductible retirement account in certain cases (it depends on your age (the older you are the more you can deduct) and profit level). You tell me how much you want socked away in a tax sheltered retirement plan and I’ll share the vehicle you’ll drive to the Vanguard index fund. Okay?
The New Employee
You can be an employee of your SO or the LLC he sets up. He can provide you health care benefits (usually) and deduct the premiums. However, if he is a sole proprietor, his premiums are deductible (usually) as an adjustment to income on his personal return. This means he still pays SE tax on the premiums. We used to use Section 105 to work around this issue for married people. I don’t see 105s much anymore as there are so many easier alternative options.
An LLC electing as an S corp avoids this issue, as the entity claims the deduction. (Tax professionals reading this: I’m keeping this simple for my kind reader’s sake. My statement is 98.27845363% accurate. We don’t have time in this post to discuss why my statement isn’t 100% true.) If handled correctly, the health insurance premiums are reflected on the W-2. Technically there is a FICA tax issue, but mitigated by adjusting payroll to reflect a lower reasonable wage based on a lower level of profits due to the premium deduction by the entity.
This gets complicated; I understand. I’m glossing this over and tax pros are rolling their eyes because I’m telling a half truth. But from your viewpoint, it will look pretty much like I outline it. And my goal is to give non-tax professionals a reasonable way to view the options they can understand without years of tax experience.
In short, you can (and if you provide services for your SO’s business) and should be a W-2 employee. Even a token wage of say $15,000 allows you health benefits paid for and deductible by the business, plus the opportunity to start building your retirement account. Whether he remains a sole prop or decides to go the LLC route, there is a benefit to you and your SO (most likely) for doing so. Marriage also plays a role so we will address that next.
So, Should We Run Our Marriage Like a Business?
In short: NO!!!
What you and your SO have is not a business; you have an interpersonal relationship! You have a business relationship with a prostitute, not a loving SO. Can I be more blunt?
Mrs. Accountant and I have a nurturing 30+ year marriage. Mrs. A works part-time for my business. She is an employee of the entity! Yes. But my relationship with Mrs. A is not a business relationship!
Maybe I’m reading your email wrong. Tax issues do play a part in the decision-making process of living together, marriage and having children. Reading between the lines, I think your income is really low. As a result, there is probably a tax advantage to getting married.
But you don’t get married to save on taxes!
Even going back to school will probably be a better tax deal if you are married, not that that should be the reason to marry.
Please, come with me. (I’m putting my arm around your shoulder and guiding you to a chair where we can talk face-to-face without a desk between us. I lean in close and talk in a low, calm voice as a father does.) I have two young adult daughters. As their dad I tell them to think clearly when planning a life with someone. Living together is as serious a matter as marriage.
You have a child together and another on the way. (Congratulations!) You have a beautiful and awesome responsibility. If you are in love and have talked adequately about a life together as husband and wife, and worked out any issues and still find you want a life together, then have that life. It ends soon enough. Jordan Peterson says the meaning of life is to end needless suffering. Loneliness is a form of suffering. You have it in your grasp to end that. Your ships met in the night and both of you decided to sail together. With two children you already know the right thing to do.
Marriage has massive risks, especially for the male. But you already have children! And there are incredible benefits for both parties, as well. If you are ready, do what your heart tells you. Your mind should have ironed out all the issues by talking honestly together. If you are happy as you are, then don’t change anything. If marriage is both your callings, then do that.
Please, for the love of God, don’t get married (or refrain from getting married) due to taxes.
If you need anything else, you have my email. My door is always open to discuss this with all the personal details.
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Marriage and Money: Finding the Perfect Mate | The Wealthy Accountant
Friday 25th of January 2019
[…] It is vital to keep communication open with your significant other. Be honest. Allow room for personal spending without accountability. If necessary, set a spending limit so finances are not stretched. Too frugal can be just as damaging to a relationship as over-spending. Honest discussion allows you to find your common ground or lack thereof. It is okay to be the frugal one in the household. Don’t require the wife (or husband) to be a carbon copy of you. […]
Tuesday 17th of July 2018
If I just say 'yes' to this question, I fear I might be misunderstood. Nevertheless, my answer is still 'yes'. Marriage should be run as a business in term of planning, goal setting, coordination, hard work, mutual respect and succession. It is not just about money or taxes. It goes beyond that. Marriage has to be handled as a business. That is the only way the parties involved can profit from the relationship.
Tuesday 17th of July 2018
You make good points, kits. I have an employee who responded the same way. As long as marriage is more than a financial transaction there is hope.
Sunday 15th of July 2018
Hi Keith. Quick question. I'm technically self employed as an independent contractor. I work at one place and on all other accounts I'm an employee except for when it comes to how we're paid. I currently live in Virginia (born and raised in Wisconsin). I make roughly $40k. Should I create an LLC for myself?
Sunday 15th of July 2018
Not enough information, Jen, to express an opinion.
Friday 13th of July 2018
Ha. Years ago, a friend/client was going to get married the following year. After a quick discussion and review of the facts, I advised them of how much they would save on taxes if they got married in December current year instead. That particular year was unique and saved them about $7,000 in taxes. Our running joke is "they got married to save on taxes!"
Saturday 14th of July 2018
I have similar stories in my office, Sharma. I also have a horror story.
My very first client ever had a high school sweetheart. I encouraged them to get married and sold the advice by outlining the tax savings. (Their taxes would be somewhat lower jointly.) Unfortunately, their love was really a strong friendship. Once married they fought like cats and dogs. A year later the marriage was annulled. Both are now married to someone else, but maintain their friendship. I learned a valuable lesson: don't encourage people to get married over money. BTW, he still comes in.
Thursday 12th of July 2018
Great article, as always! I think it will take me a few spins to soak it all in as my SO and I have often had questions about what marriage will do to our tax status and all that to understand the changes or risk to what we've built.
Usually, when I've asked questions in the ChooseFI group I'm battered with "wow, if all you care about is money, you shouldn't be getting married//you don't truly love your SO." Funny story, we BOTH have these questions and we simply want to understand what marriage DOES and how it impacts the functions of our money. People get real upset when I ask though, as if simply asking or wondering is an insult to love itself. If we're happy in a relationship, would marriage help or hinder how we run our household? No harm in understanding!
I loved this article but had a question about this part- "Marriage has massive risks, especially for the male. " Can you unpack that for me? Not tracking.
Thursday 12th of July 2018
Money is important, Shannyn. Mrs. A and I talk money all the time; it's part of our marriage. Reviewing how marriage (or living together) affects your finances is a smart move I encourage it. I disagree with your group's haters. Your questions are valid.
Ah, yes. The marriage risks to men. I knew when I wrote it I would be called out. I don't want to go too far off the path on this, but it needs discussion. In the United States (it's spreading all over the Western world) men are at a serious disadvantage in marriage and romantic relationships. 90% or more of all alimony and child support is paid by the male even if the female treats the children poorly or committed infidelity. 70% of divorces are initiated by the female. If a male leaves the marriage due to infidelity or other reasons, he pays up. If the female commits the same act, the male still pays up. There is a societal incentive to the female to marry without concern over bad acts; a built in risk for the male. You can review the endless list of YouTube videos on the subject. I don't want the message of this post drown out by an entirely different topic.
This can easily become a heated topic. You already have children so the risk is already present, but doesn't matter unless you separate. I also have a solution that is not very romantic: get a prenuptial agreement. It isn't romantic, but it protects all parties. I even published on this a year ago.
Sometimes it does sound like marriage—even having children—is a business arrangement. I think planning is necessary for a good life. That isn't business, that is life.