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EPISODE 122: How to Pay Your Children in Your Practice

Jarrod is joined by Steve Levy, CPA, and Colt Smith, Senior Tax Accountant, to discuss the tax benefits and other positive outcomes of having your child work in your dental practice.

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EPISODE 122 TRANSCRIPTION

Announcer
Hello, everyone. Welcome to The Millionaire Dentist Podcast brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Jarrod Bridgeman:
Hi, and welcome to The Millionaire Dentist. I am Jarrod Bridgeman, your host. Casey is offsite today. He is in Salt Lake City doing his Topgolf meet and greet because he's a celebrity now. I don't know if you guys know that. Today I have with me Steve Levy who's a CPA and a JD, and Colt Smith who's our senior tax accountant. How are you guys doing?

Colt Smith:
Doing pretty good, Jarrod, how are you?

Jarrod Bridgeman:
Not too schlubby. Steve?

Steve Levy:
Doing great.

Jarrod Bridgeman:
I knew it. I could tell by the look on your face. You're doing well. So I thought today we'll talk about child labor today because we have questions about having your own children or even just minors work in your practice. So I thought we could start today by asking, is that a good strategy and why, or why not? Whoever wants to go first, just rapid-fire. You guys are making eyes at each other.

Colt Smith:
Yeah. I mean for hiring your children into your business, it's always a good idea if there's legitimacy around it. I think that's one of the main things is being legitimate. Some strategies for paying your kids, the whys around it. You can deduct those salaries for your business. You can avoid federal income tax if you pay your kids up to $12,950. That's the standard deduction for the new tax year. That can help kind of accelerate any retirement plans for your kids, whether that's a Roth or some college savings, you can be-

Jarrod Bridgeman:
Between the two of those, do we see one more often than the other, like the college savings versus the Roth or IRA?

Colt Smith:
It's kind of both, honestly. And I wouldn't want to speak on that just because that's more of a planning subject.

Jarrod Bridgeman:
Gotcha.

Colt Smith:
But from intangible reasons, honestly it gives the kids a sense of accomplishment. It gives them the sense of the value of a dollar, hard work, that type of thing. The holes movie, digging holes for discipline. It can kind of act as a weekly allowance sort of situation with them doing work in the business. Now when it comes to that work, it needs to be legitimate, like I said. So when it comes to setting them up on payroll, you would act-

Jarrod Bridgeman:
You can't be a snack tester.

Steve Levy:
Unless that's your business, right?

Jarrod Bridgeman:
That's true.

Colt Smith:
But I mean, if we're talking about dentists here, having them come in weekly, clean the office, help with filing, scanning, invoices, stuff like that to be legitimate work would be definitely needed.

Jarrod Bridgeman:
Got it. Steve, let me ask you. So I said that the top out there in the federal income tax was $12,950.

Steve Levy:
Correct.

Jarrod Bridgeman:
So does that mean I can hire my kid for an hour for $13,000?

Steve Levy:
No, that's not really all that reasonable. You should probably look to see what the rate for wages, hourly or whatnot, might be for an equivalent hire for that particular job. That would be a nice baseline for it.

Jarrod Bridgeman:
So he'd be looking more towards like depending where you live, like $12 to $15 an hour?

Steve Levy:
Yeah. I would say like, what would you pay someone that's not your relative for doing that job?

Jarrod Bridgeman:
Gotcha. Now you can have them ... Do they still ... Let me ask you this. A little bit off-topic, but still on here, do the child labor laws apply to your own children? Do they have the same, it can only work from depending on their age, like 4:00 to 7:00 PM weekdays and stuff like that? Or is that a-

Steve Levy:
Yeah, it's really going to be across the board. It's definitely something to look into to make sure you're not violating that because the Department of Labor, federal and state can come in and say, "Hey, you're violating these rules," that might give you a penalty and you definitely want to not have them on your radar. So typically, we're talking about teenagers doing this work because that's generally the age range where work can be done, the minimum age range for that.

Jarrod Bridgeman:
Gotcha. Colt, with ... I'm sorry, go on.

Colt Smith:
I was going to say so in other words, don't have your newborn on payroll because that's a red flag.

Jarrod Bridgeman:
Question though, what if I'm working on a brand new website for my practice and my kid is old enough to have their baby teeth in. Could I hire my child as a model for a photograph in the website?

Steve Levy:
Yeah. I think that works. Obviously, we see in the entertainment business lots of child actors. And as long as they're supervision in that situation that we certainly see that happening.

Jarrod Bridgeman:
Now, if they're at the age of crawling, can I just tie Swiffers to their hands and knees and have them clean the floors?

Steve Levy:
I mean, that's a horrible visual.

Jarrod Bridgeman:
I mean, I don't do that now. My ex-wife is going to kill me. So Cole, when it comes to having your child in the office and working, do they still do all the normal paperwork?

Colt Smith:
Yeah. You would want to get the normal paperwork filled out, the W-4s, the state withholding documents. It just, one, it makes sure that they have the right age range on there. So that way, if you're not an S Corp, you can get away with not paying social security and Medicare taxes for those wages. So if you are an S Corp or a C Corp, you don't fall under that. So depending on where you're set up as a business, it's important to get the documents filled out accordingly just like you would with any other employee.

Colt Smith:
And we have seen instances where people set up family management companies. If their practice is an S Corp, they might set up a family management company as separate entity, maybe as a sole prop or an LLC, so that they can pay their kids and get away with not paying social security and Medicare tax for those wages. However, you got to keep in mind that with new entities, there's going to be additional fees to set up the entity itself. Maybe some additional payroll service fees. You might have some additional accounting fees for whatever firm you're with. So even though you might be saving some money on social security and Medicare, you got to take into account those other fees. So jumping through those hoops, it's possible. But just keep in mind the cost associated with it.

Jarrod Bridgeman:
Gotcha. So, I mean with all that, it sounds like you still need to have your child go through actual payroll as well?

Colt Smith:
Yes.

Steve Levy:
Yeah. 100%.

Jarrod Bridgeman:
This can't just be like a-

Colt Smith:
Cash at the table, absolutely not.

Jarrod Bridgeman:
... handwritten check?

Colt Smith:
Yeah. You can't just throw it in their piggy bank and be like, "Here you go." No, you got to have it through payroll.

Steve Levy:
And on that strategy as well as the hoops, you've got to still have the formalities needed as if this other company was a real other company that you hired them. You've got contracts for the family management company and proper lines of where the payments are going. So, everything is observed as if they're completely separate company.

Jarrod Bridgeman:
Gotcha. So either way, there's going to be work to do to set it up?

Colt Smith:
Yeah. And the IRS is aware of this benefit. So, they know people try to do it. So just try to be as legitimate as you can with all the correct documentation and paperwork for payroll and handy purposes.

Jarrod Bridgeman:
It could be worse too, because it's dealing with a minor. I don't know if the IRS looks harder like, "Well, cool. You took advantage of a 14-year-old."

Colt Smith:
Well, and that's why I want to bring up the separate entity. I think bringing up a separate entity for a family management company, I think, that in itself could be a red flag because you're creating that extra paperwork. So if you are having your kids come in and cleaning the practice or helping with different front office tasks here and there and paying that through the practice, again, that might be best anyway.

Steve Levy:
Plus there's even a special site that the IRS has, a page that's entitled family help. So they know exactly kind of how the different structures are in terms of possible Medicare and social security tax avoidance by this separate structure. They're teaching about it. They're saying, "Hey, if you've got a sole prop, you don't have to pay these taxes. And if you have this one, you do." So they're kind of educating people on that type of arrangement by telling them what it's about.

Jarrod Bridgeman:
Let me ask you. So, my kid's getting paid and he decides to put his money into a 529 plan. Now that also comes with a tax deduction for the individual, right?

Steve Levy:
Well, not exactly. It just depends. Sometimes, there's a state deduction.

Jarrod Bridgeman:
So, I believe in Indiana, there is.

Steve Levy:
Yes, exactly. There is that, it's actually a credit for Indiana. So, it depends on the state. But the great advantage of 529 plans is the growth of the funds essentially tax-free. And when they come out, as long as they're used for educational purposes and they've expanded educational purposes too to include not just college but also private school and whatnot. It depends on the rules. But that's definitely the best advantage of 529 plans, is tax-free growth of the funds, hopefully, growth in that fund.

Jarrod Bridgeman:
So nearly 13,000 federal wages there. Okay, Colt, what does that actually mean for the practice each year?

Colt Smith:
For the practice each year? Hypothetically, say you're paying your child $12,950 in janitorial-type wages for the practice. The practice would get that deduction of $12,950, and then that money that the kid is earning would not be taxed at the federal level. So you're getting that deduction on the practice side and your kid's earning that income but not having to pay any federal tax on it.

Jarrod Bridgeman:
So that all sounds good. And let me ask you this. We've had a few people we've spoken to over time, Casey, especially. There are some dentists out there who believe that this may be the magic button that it can help save their practice and sometimes are even told that, not by us, of course. What is your answer to that? I mean, is this something that will just really, really help out clean the board?

Steve Levy:
It's a strategy. I wouldn't go as far as say, saving your practice. Unless maybe you have 10 kids, then we're talking about big deductions, but they're not all going to be of age to work. There are certainly other aspects to look at in terms of tax management. The biggest thing that we look at is expectations and tax surprises to try to minimize that. That's really the biggest thing to watch as far as whoever is watching your taxes to make sure that those tax surprises are at a minimum. This is really kind of a small deduction in the whole scheme of things.

Jarrod Bridgeman:
Especially if you're looking at like a million-dollar practice.

Steve Levy:
Yeah, certainly. And especially the setup of a family management company to save Medicare taxes. We're talking about small potatoes, especially not being worth the headache. And if you make money, you're going to pay taxes. It's just kind of how it is.

Jarrod Bridgeman:
Yeah, unfortunately. So really this could be ... I mean if you're already doing it, make sure you're doing it right. Make sure you're getting those deductions, but this is just a small thing. And really there's a lot more things that need to be worked on in your practice to really capture more money, right?

Colt Smith:
Yeah. Like Steve said, very small potatoes here. But it is something that is a good strategy. The IRS allows it. They know about it. So just make sure you're running through the right hoops.

Jarrod Bridgeman:
Well, guys, I really appreciate you coming by today and giving us this info on the child labor and the taxes and all that. Well, Colt, thank you. And Steve, thank you. I hope you guys have a good day.

Colt Smith:
You as well.

Steve Levy:
You as well.

Jarrod Bridgeman:
We will be on the road this summer, by the way. We will be at the Florida Dental Convention from June 23rd through the 25th. And we will be at the AGD2022 event from July 27th through the 30th. Keep a lookout for our upcoming events at our website, fourquadrantsadvisory.com, and just click on the events button at the top of the page. We will have links to conventions we're going to, trade shows we're going to in our own sponsored events as well. And if you don't mind, give us a like, and a follow on Facebook, Instagram, Twitter, or even LinkedIn. We're there too. All right, thanks a lot. Bye.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.