Are you adjusting your child’s working bone?
As a chiropractor, you know and understand bones. But have you ever heard of a “working bone”?
This phrase isn’t in reference to bone functionality but is a metaphor for a human trait that you may be able to flex in your practice to teach your children the work ethic while saving tax dollars.
To share an example, our family was raking leaves one fall and my older daughter was protesting against her manual labor task. I tried to motivate my despondent child by telling her everyone is born with a working bone and some people’s working bones are stronger than others.
To render my point, I finished by saying, “I’m starting to wonder how strong your working bone is.” Her wit would not be outdone as she replied, “Yeah, I don’t really have a working bone so can I go inside and relax?”
Make the tax code work for you
Managing a practice and raising children require some of the same gumption, and it’s great when the overlap can benefit both at the same time. One such overlap can be found in IRC Code Sec. 3121(b)(3)(A), which excludes the payment of wages to a child under the age of 18 from employment tax liability.
For those of you who have employees, you understand there is a payroll tax cost to hiring someone because you are required to match the Social Security and Medicare taxes withheld from the employee’s paycheck—plus you’re out of pocket for any unemployment taxes. Social Security and Medicare taxes cost an employer 7.65 percent of taxable wages.
Unemployment taxes vary by state and occupation, but one can safely assume a minimum total tax cost at 8 percent of taxable wages. That’s $8 for every $100 you pay your employee. So an employee earning $15 per hour is costing your practice $16.20 per hour before any benefits or retirement plan matching.
However, if the employee is your child and under the age of 18, this payroll tax cost can be eliminated, which saves your practice 8 percent on every labor dollar paid to your child.
None of this applies if your practice isn’t organized correctly.
The legal structure of your practice will also dictate the applicability of this strategy. Sole proprietors and single-member LLCs can take advantage of this strategy if they are not established as entities separate from the owner.
The strategy also applies to partner- ships and multimember LLCs taxed as partnerships where both partners are the child’s parent. Corporations are not allowed to use this strategy but may still hire the children of share-holders with the compensation being subject to payroll taxes. The payroll tax savings is a great feature of this strategy but it shouldn’t overshadow the intangible benefits of developing a child’s work ethic.
Keep the profits in the family
Hiring your child to perform tasks necessary to your practice can also be an effective way to teach the value of work and personal responsibility, while ultimately saving your practice and family money. Your
child’s compensation can be spent or invested as you and your child feel necessary.
Ultimately, the compensation is earned and paid to your child, but it presents an opportunity for you as the parent to coach your child’s financial perspectives. Perhaps the compensation is set aside for college tuition, an automobile, or a new computer. It can even be contributed to a qualified retirement plan such as a Roth IRA.
When and how much to pay is at your discretion. Think of it like a tax-deductible allowance. The compensation paid to your child is an ordinary deduction just like the wages you pay to nonfamily employees. You are reducing the taxable income of your practice but keeping the money in your family.
Whether or not to file a tax return
If your child tends to work more than play, then your child may face the administrative burden of having to file a federal income tax return. Any compensation your child receives from your practice is reported on an IRS Form W-2 and, depending on the amount, may require your child to file an income tax return.
In 2015 and 2016, your child could earn up $6,300 without having to file a federal income tax return. If you paid $2,500 of W-2 compensation to your child, and it was the only income he or she earned in 2016, then there wouldn’t be a need for your child to file a federal income tax return.
However, if your child worked for another employer or just worked heavily throughout the summer for your practice and earned more than
$6,300, then some of your child’s income will be taxed. Regardless, don’t let the burden of filing a tax return or the tax cost prevent your child from working.
Get what you pay for
Compensation should be commensurate to the work performed. A child’s age, mental capacity, physical ability, work experience, and personal schedule should be taken into account. It is possible to pay a younger child to take out trash and refill copy paper while paying an older child to vacuum, clean restrooms, and wash windows.
Let the child’s work speak for itself and then pay accordingly. You’ll not only be fair to your practice and other children, but you’ll teach a valuable life lesson in the process. Some say money and family don’t mix, but when both can be parlayed into a win-win scenario for the chiropractor parent and child, then a strong “working bone” is adjusted and a practice gets better utility from its profits.
Trevor Seales , CPA, MTAX, EA, is the CFO of Best Practices Academy and a professional tax practitioner in private practice serving individuals, corporations, partnerships, estates, and trusts. He has worked with single-doctor practices as well as multidisciplinary practices through innovative tax and financial planning. He can be reached at email@example.com.