Alimony vs Wages

Today TaxMama hears from Margaret on the Internet, who has this upbeat idea. “I have been divorced for three years with good relations with my ex. We continue to work together in a small family construction business. I am wondering if, in the long run, I would be better off re-categorizing the alimony to W2 or 1099 earnings from the company so I can establish more of a base for social security or retirement funding through a 401K. I am 49 years old with 2 teenage boys. I have been a stay at home mom for about 13 years “

Dear Margaret,

Good for you! What an interesting idea!

Some people are as better partners or friends than they are as spouses. (Or is the plural of spouse – ‘spice’?)

If the court awarded the payments, and spelled out how long they are to run in your divorce agreement, then they’re alimony.

Alimony is something you get from your ex husband or wife to compensate you for the years you were married and supported him so he could build his business or career, but did not get to develop your own career. It’s money from the past.

Do NOT EVER change the terms of your divorce agreement to eliminate that alimony. You never know when that source of income will be critical to you. Years pass. Things change.

Since you’re getting along so well, right now, I don’t mean to stir up trouble, but…I do want you to open your eyes.

If you are working with him in the family business, you should be getting paid for that. He’s getting paid for his time and efforts, isn’t he? You should be getting a salary, if the business is a corporation.

Or, if it’s jointly owned by you and him, you should be getting a check for half of the profits each month.

It should be reported on a partnership K-1. That way, yes, you would be paying taxes on the profits – both income taxes and Social Security. You can use those earnings as the basis for any number of retirement plans.

But, when you’re the owner, and there are employees, whatever you and your ex-husband do in the way of retirement plans, the company is required to offer and/or fund for the long-term, full-time employees. It gets relatively complicated – so talk to your company’s tax professional.

If your only goal is to report enough income to establish a base for Social Security, then take a small salary or draw, like $1,000 per month.

And bear in mind that, after being married to him for over 10 years, if you are his first wife, or the first who’s been with him for 10 years or more, you’ll be able to collect Social Security based on his earnings, even if your earnings are much less.

Remember, you’ll find answers to questions about alimony and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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