Tax Issues (and Solutions) When Your Spouse Receives a Bonus

May 21, 2019

Recently, a business owner client reached out to me and said, “Hey, Justin, I need some help. My wife is getting a bonus. What should I do with it?” Additional income, especially in the form of large, unexpected bonuses from a spouse’s employer, could wreak havoc on business owners’ tax planning and wealth management. So what should business owners do?

Podcast Time Index for “A Business Owner’s Employed Spouse Receives a Bonus”:

01:48 – A Business Owner’s Employed Spouse Receives a Bonus: How Should We Deal With It?
03:29 – Possible Problems
04:31 – What You Could Do
04:58 – Consult Your T-Chart
05:17 – Reduce Your Own Income to Increase Your Business’s Profits
07:00 – Tax Considerations
07:42 – 6 Considerations
08:23 – Solidify Your Emergency Fund
09:34 – Defer the Bonus into Your Spouse’s Retirement Account
11:15 – Pay Off Unsecured Debt
12:08 – Make an Extra Payment on the Mortgage
14:37 – Spend the Money and Create a Memory
16:09 – Wrap Up

Financial Problems if Your Spouse Receives a Bonus

Usually, when you or your spouse receives a bonus from an employer, it’s an exciting and happy time. It should be! You should be rewarded for a job well done. You’re probably already thinking of all the ways you can spend your money – vacations, new cars, house renovations, etc. Yet, when one of you is a business owner, you have to be wary of additional money coming into your family’s budget. Unexpected money, especially large sums of it, could cause your family problems. How?

#1 – It could phase you out of the Qualified Business Income (QBI) Deduction.

Currently, business owners whose 2018 incomes fell below $315,000 for joint returns or below $157,500 for other returns qualify for a 20% tax deduction. If you’ve created your ideal budget and have determined how much to pay yourself from the business according to that budget, then your spouse’s bonus could tip you over the $315,000 income limitation for the QBI Deduction.

#2 – It could phase you out of the ability to contribute to a ROTH IRA.

In 2019, if your adjusted gross income (married filing jointly) is less than $193,000, you can contribute up to the $6,000 limit or the $7,000 limit if you are over age 50. If your income is between $193,000 and $203,000, you can make reduced contributions, but if your combined income is equal to or greater than $203,000, you cannot contribute to a ROTH IRA.

#3 – It could hurt your chance to maximize your Social Security benefits.

For 2019, the maximum amount of taxable earnings individuals can make is $132,900. If your spouse’s bonus increases your combined income in such a way that you must decrease your income from the business, you may lose the potential to maximize your Social Security benefits.

What Should Business Owners Do If a Spouse Gets a Bonus?

As I start to think about the bad things that could happen if your spouse (who does not work for your business) gets a bonus, I start to realize that there are some really interesting plays you could make here. All is not “lost” if you have unexpected money come into your family’s budget! It should be a happy and exciting time, so let’s figure out what you can do to make it happy and exciting.

You can:

#1 – Reduce your owner’s draw/your dividend/your take-home pay from your company.

First of all, you could reduce your take-home pay from your company by the amount of your spouse’s bonus. If your spouse gets a $40,000 bonus, then reduce your income by $40,000. Thus, your family’s projected, budgeted income might remain the same.

#2 – Create additional business expenses.

If you are receiving a salary from your business, then reducing your salary may be all you need to do to offset your spouse’s additional income. However, if you are receiving an owner’s draw, then you may have to create additional, tax-deductible business expenses from your business to offset the unexpected income. Now may be the time to solidify your marketing campaign, purchase a CRM system, or hire an additional key employee.

#3 – Increase deferrals.

Along with creating additional business expenses, you could increase your business’s tax deferrals. Maybe you create profit-sharing in the business with this extra money you don’t need at home through a 401(k) plan. Perhaps you start a cash balance plan, which is a twist on a pension plan. You might even be able to add your spouse to the business’s payroll like I’ve talked about in the past. Have your spouse make a maximum contribution, and then have the company match the contribution.

What to Do with The Spouse’s Bonus if You’re Not Worried about Tax Planning

So let’s talk realistically, too. If your spouse gets a bonus, your family may need or want to use the money for other things. Obviously, the suggestions above are ideal, but I want to be real, too. If you get extra money in your personal budget, you can use it and still be smart about it. If my clients aren’t worried about the tax ramifications of extra income, then I typically tell them to:

Solidify your emergency fund.
Pay off unsecured debt.
Pay a little extra on your mortgage. (See Mortgage Debt: Pay It Off or Invest? Which Should I Do? for reasons why I don’t recommend paying off your mortgage.)
Invest in retirement assets like 401(k)s, 403(b)s, IRAs, ROTH IRAs, etc.
Invest in non-retirement assets like real estate, additional businesses, collectibles, etc.
Give some of it to charitable causes.
Spend it on memory-making activities.

Next Steps…

Look, if you are a business owner, and your spouse receives a bonus, your tax planning strategies can get complicated really quickly. Talk to your business’s advisory team about which of my suggestions will work best for you. But hopefully, this article will allow you to leverage the bonus to your business’s and your family’s advantage, too. Don’t let worry rob you of the excitement of this moment. Enjoy the bonus by doing things in your business you’ve dreamed of doing if you had additional revenue, or take care of personal funds and debt.