Hiring Your Kids On the Freedom Formula For Physicians Podcast

Here’s something else that I heard about that I’d love to get your feedback on so that there is a great idea for having a spouse if you’re doing locums or something like that. What about hiring kids? I’ve heard about that as a strategy, so I’d love to hear more about hiring kids as employees.

That’s a great strategy when my kids were younger, went to private high school, that’s how we paid for high school, so they work for me on a weekend. They had a time sheet that they had to fill out that they got paid into their bank account and the school drafted in fact cannot once a month and took the money out. So I basically wound up getting a tax deduction for the tuition. You have to document. It does actually case law that says you could do it with kids as young as seven. I typically say let’s do 12 years and older. Don’t think anybody is looking to go to tax court. And seven is a pretty young age.

So is it, is there like an amount on what you can pay your kids tax free or what does that look like?

Once again, it comes down to a reasonable compensation. You have to be able to, on the audit, you’d have to be able to justify what that compensation is. So if it’s $10 or $12 an hour versus $15 an hour, I think one is much easier to justify it.

Any other?

Sure. so it’s like some sort of law, and maybe I’m misremembering this, that if you pay your kids above six, seven, eight, nine, $10,000 then it goes to the parents.

That’s on, that’s on unearned income. This is earned income and typically you are not going to pay the child know much above $6- $10,000 for your younger child.

So if you have three kids and you’re paying them $6,000 a year and going to summer camp or they go into a private school or something like that, you’re able to offset and pay that with basically tax deductible dollars.

Sure, sure. They can bank it too, right? They don’t have to spend it.

I don’t have to spend it. But you know, obviously if you are using it to pay for the school, you want it to go into their bank account and then you want them to– school to take the money out that if you want to give them money later because we want to give them money. There’s nothing that says you can’t do that.

Oh.

So the answer is yes. Paying kids could absolutely be a great strategy to get tax free money, to the kids that you don’t have to pay FICA taxes on it.

Correct. Correct. It is a very interesting way. Another thing, you know, most people have home offices, so if you have a home office, you can also have home athletic facility that’s for the use of your, the people that work for you at that Home Office. So let’s just say your athletic facility happens to be your pool. Cool. Now you can write off the expense in the pool. You can depreciate the value of that pool.

And that’s. And that’s in the tax code.

Interesting. So I guess I have to imagine some things are kind of more aggressive, right? And more audit, where the other things are not I mean?

I would say once you have the documentation behind what you’re doing. When we do a tax plan, we had the tax code that says you can do it. So we had to code that says you can do it. And if as long as you document that you’re doing what you say you’re doing your okay. Now when you have the proper documentation, you’re okay. It’s not a gray area. It’s not. Maybe the code says you can do that.

So I guess documentation of course in recording is a big deal in all of this. What about like we talk about from time to time, the physician having a side hustle of some sort or a spouse starting a side hustle as if someone is hurting at W-2 wages as a way to kind of offset some of that, you know, if they’re trying to get a business off the ground but I know there’s kind of a hobby rules about that. I had one physician asking me the other day, well, is it really worth it to go through that hassle? What do you think?

Well, you should be in business to make money typically come around where people are taking losses from year to year is that the government is going to say, well you’re really not in business to make money.

We are typically working with people that are making money so we’re just able to legally lower their taxable income. So you’re allowed to take the deductions in the tax code as long as you take the legal ones just like Warren Buffet and Donald Trump do.

So what do you think about, about that idea that–I mean is there a point where someone, a spouse is trying out something and they want to try and make money, but maybe they’re not. I mean, where do you draw that red line?

Well, I would say, you know, after two years of losses you really need to really look at it and say, okay, what’s going on here? So that’s kind of–and obviously if you have losses in well documented and that’s okay, what you are doing to produce income, you know, if it’s a duck, it’s a duck,

What would you say makes a duck then?

Well, it makes the duck if you have, you know, basic documentation that shows you’re trying to generate business if you are generating business, but at two years, if you’re continuing to show losses and there is no upside on the horizon, I think you need to really consider that–are you wasting your time? Are you in danger of potentially being considered a hobby? Honestly, we don’t come across that that much because people are looking to make money. They’re looking to legally right off what they can legally write off, but they need to make money to maintain lifestyles.

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