Subscribe
Share
Share
Embed
In Episode 97 of the Teaching Tax Flow podcast, hosts Chris and John delve into a powerful tax strategy, explaining how to income shift to family members or children. With the countdown to the 100th episode underway, this topic is timely and significant for business owners looking to control their tax liabilities. Chris and John unravel the intricacies of legally and ethically leveraging family members to optimize tax obligations, emphasizing that this strategy is not to be taken lightly or implemented illicitly.
Throughout the episode, Chris and John explore the benefits and implementation process of paying children for legitimate work in your business. By shifting income to lower tax brackets, parents can significantly reduce their overall tax burden. The discussion covers the importance of proper documentation, legitimate job roles, the advantages of different business structures, and the potential for utilizing earned income for additional benefits like Roth IRA contributions. Real-world examples make this episode a practical guide for those eager to harness this tax-saving strategy.
Key Takeaways:
- Legitimate Employment: Children must perform bona fide work suitable for their age and capabilities to be paid.
- Reasonable Compensation: Compensation must align with the nature of the work performed, avoiding any excessive payments that could raise red flags.
- Proper Documentation: Maintain thorough records similar to those for any other employee, including timesheets, task records, and payroll tax filings.
- Tax Benefits: Income shifted to children often incurs a lower tax rate or becomes tax-free, and specific conditions eliminate Social Security and Medicare taxes.
- Roth IRA Contributions: Children’s earned income allows for contributions to a Roth IRA, promoting long-term, tax-free growth of their earnings.
Notable Quotes:
- "The first benefit of paying kids is shifting the income to a lower marginal tax rate within the family." - Chris Picciurro
- "If you want to be a duck, you got to walk like one and quack like one." - Chris Picciurro
- "Ideas are cheap and implementation is valuable." - Chris Picciurro
- "Highest and best use...identifying what you're good at and sticking to it." - John Tripolsky
- (00:04) - Income Shifting to Family Members for Tax Benefits
- (06:40) - Benefits and Legalities of Income Shifting by Paying Children
- (09:58) - Legal Tax Strategies Versus Risky Cheat Codes
- (10:49) - Tax Benefits and Legalities of Paying Your Children
- (19:21) - Tax-Free Growth Strategies for Teenagers
- (21:45) - Legitimate Ways to Save Money by Employing Your Children
Creators & Guests
What is Teaching Tax Flow: The Podcast?
Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.
Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.
In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.
Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.
Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com
Welcome to the teaching tax flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
John Tripolsky:Hey, everyone. Welcome back to the Teaching Taxable podcast, episode 97. The countdown continues to a 100. You can do the math. Pretty simple.
John Tripolsky:So today, we are gonna look at a little bit of a smaller topic, a little bit of a younger topic, but a huge strategy you can take advantage of and that is how you can income shift to family members, or children, likely family members. You can't just go get a kid, start paying them, call them family, whatever. We're we're gonna leave that out of it. But we're gonna talk about how businesses can take advantage of this is a huge opportunity when it comes time to owning that relationship with the IRS, aka owning your own tax situation, aka, aka, controlling your own tax bill.
Ad Read:Hi. Chris Picciurro here, founder of Teaching Tax Flow, cohost of the Teaching Tax Flow podcast, and pickleball enthusiast. Yes. If you listen to the podcast, you know almost every episode we talk about pickleball, the most popular and growing sport in America. We have tons of opportunities for paddles and and pickleballs, but we don't have a lot of great gear on the market.
Ad Read:Why I'm so excited to announce that Sunsets and Dinks are now a sponsor of the Teaching Tax Slow podcast and produce amazing gear, not only to look at, but you feel confident on the court. Because you are part of the teaching tax flow community, you get a 15% discount on all your orders with them. I know I love the gear I received and I have quite a good record while wearing it, believe it or not, even at my level. Go to teaching tax flow.com backslash pickleball, and simply enter t t f 15 in the serve up promo code area of your paddle rack. Let's get into it.
John Tripolsky:Chris Picciurro, welcome back to your own show, sir. How are we doing?
Chris Picciurro:I'm doing great. Great to be back with you, of course, Johnny t. How are you?
John Tripolsky:Doing good, man. I'm actually sitting here on my desk. There is a picture of my little 3a half year old. So there's not a whole lot she can do for my business now except, you know, put land mines also known as Barbies, dolls, cars, magnetiles all around my feet so I stand up and injure myself. But eventually, right, she's gonna get to an age where she could substantially help me with certain things.
John Tripolsky:Right. And that's the key thing. Right? Like, you just can't sit here and look at me, and I pay you $9,880 a year.
Chris Picciurro:No. It doesn't work that way, at least legitimately. We talk about teaching tax flow legally and ethically reducing the tax you pay in your lifetime. And one of the things that we have a lot of people in our community ask about, because why? They hear it on TikTok.
Chris Picciurro:They hear it on Instagram. Pay your kids, you know, x amount of dollars, which is exactly the standard deduction for doing work. We're gonna demystify that. I will tell you there are several people in our private CPA practice and in the teaching taxable community that are legitimately paying their kids and reaping a tax benefit. All of my children have done legitimate work for me, even my little 11 year old, believe it
John Tripolsky:or not. And some people, given the type of business, there's like I mean, there's a lot younger individuals can do to help out. Right? Stuff that's not you know, we we talk about I think our our friends over at engineer tax services. You know, we hear from them.
John Tripolsky:I think they have a whole conference on it. Right? Highest and best use. Right? So it's kinda identifying what you're good at.
John Tripolsky:Stick to it. You know, if you're out there face to face with clients all day, organizing paperwork is not really the highest and best use of your time. Right? And that's where these younger chaps and young ladies can step in. Right?
Chris Picciurro:You are correct. We're gonna dive into it because it's a great strategy. Before we dive into it, in all seriousness, thank you. Feel like I I know I've been trying to say it more. When we first had those first episodes, man, we were hoping we'd get 5 people to listen because we knew our wives and our parents wouldn't.
Chris Picciurro:Well, maybe your dad would. That's about it. He's a great member of the teaching tax law community, but it is humbling to see the tens and tens of thousands of people that have listened to this podcast because of listeners. Honestly, it's listeners sharing the podcast, listeners liking it, and really giving us the topics to talk about, and they're the gas that goes into our engine to do this. So thank you, first of all.
Chris Picciurro:Let's talk about, John, what you said, income shifting to a related party. There's several different types of related parties, but we're gonna focus on children. So we're gonna talk about the benefits of that, then I'm gonna talk about how to do it legally and ethically, how to implement the strategy, and then some practical examples. And as icing on the cake, I'm gonna give you a blend. We talk about in teaching tax flow that strategies tax strategies don't live in a bubble.
Chris Picciurro:They're blended together. They work many work well together. So I'm gonna on top of the income shift to the children, I'm gonna put a put a cherry on top. And we actually have some resources to help you with implementation on both of the strategies we're gonna talk about. So let's first talk about the benefits of paying children, John.
Chris Picciurro:I'm gonna put you on the spot. We're gonna see if you're paying attention to some of our presentations at live events lately.
John Tripolsky:Oh, boy. Here we go. Here we go. I didn't go to all the sessions. So if I don't know it
Chris Picciurro:Okay. John, what's the number one key performance indicator, KPI, for tax planning? Getting it done?
John Tripolsky:Yeah. Oh. Getting it done.
Chris Picciurro:Hey. That's pretty good. Doing it is important.
John Tripolsky:Do yeah. Doing it. No. That's not my real answer. Actually, I don't know what my real oh my gosh.
John Tripolsky:I don't know. The bad part is is I thought I'd
Chris Picciurro:done because you're just the good looks you're you're just the good looks in this organization.
John Tripolsky:Thing is is I probably am the one that wrote it on your slide. And I don't even remember what it was. I don't know. But, yeah, I mean It is.
Chris Picciurro:Your your MTR, marginal tax rate.
John Tripolsky:Oh, I'm looking at that one.
Chris Picciurro:I'm okay myself. The biggest benefit of income shifting of paying a child is to take a deduction or take income off of a tax return that has a high marginal tax rate, and to place that income onto a tax term with a lower zero marginal tax rate. We know one of the three laws of teaching tax flow is that tax agencies are your involuntary business partner. You could pick your tax or the IRS could pick your tax. It depends on if you wanna do the proper planning.
Chris Picciurro:So the first benefit of paying kids is shifting the income to a lower marginal tax rate within the family. The second benefit for kids is that a lot of times, the earnings are tax free for the children. From a federal income tax perspective, we're gonna talk about self employment tax or social security and Medicare in a moment. Why you might say? Because of the standard deduction.
Chris Picciurro:So if a standard deduction's $18,000, just for example, and a child makes $8,950 on his or her w two, then that would all be tax free for the child. And in fact, in that case, if the child did not have any type of tax withholding, it would not have to file a tax return. That being said, for single taxpayers for 2024, the standard deduction is $14,600. So what you hear sometimes on the TikToks of the world, hey. Pay your kid $14,599 tax free, just in that voice, by the way.
Chris Picciurro:That's not how it works legally and ethically. But if the child makes that much money or less on a w two and has no tax, federal tax withholding, it's not required to file a tax return, and it doesn't owe any tax.
John Tripolsky:And and, Chris, something you mentioned Another advantage. Times. I think you probably mentioned about 3 times, which is good. And now I'll say it again too is legally and ethically. Right?
John Tripolsky:So a lot of the stuff that's out there and, again, coming from a marketing guy, it's almost a a grab and go in a sense of, you know, grabs your attention and pushes you out somewhere else, you know, to, I don't know, purchase something. There's some something in there as a call to action where they're not really following it up with, you know, you can do this legally without really any red flags per se. Right? So it's almost in my mind, Chris, like you, you guys do a great job this with your clients, the presentations. You know, I've seen you do the ones we do when we're at a lot of these conferences is it's almost like you have 2 things.
John Tripolsky:Right? And thinking of tax planning and strategies, you you have the playbook, which really in a sense is, quote, unquote, provided by the IRS for strategies, and then you have cheat codes. Right? So cheat codes are a half arse way of doing something that you shouldn't be doing in the first place. And if you get caught, there's penalties, there's repercussions.
John Tripolsky:With those strategies, there's not. And if done right, there's immense positive outcomes. Right? So kinda think of that playbook and cheat codes, cheat codes being the quick, hey. Just give them money and deal with it later where the strategies are obviously legal and ethically, them doing valid legitimate work.
John Tripolsky:True.
Chris Picciurro:Yeah. If we had a 4th law of teaching tax law, maybe one day we'll vote it in, it would be that ideas are cheap and implementation's valuable. That's the because people, well, you're paying my I've heard people call us up to hey. I heard I should pay my children. They don't even have a business.
Chris Picciurro:They work somewhere as a w 2 for w 2. They have no where would you deduct this? There's nowhere to deduct it. Or I own a rental property. I'm gonna pay my kids.
Chris Picciurro:Okay. Great. First of all, you're not paying self employment tax on the rental. 2nd of all, you probably you the person had a loss on the rental that was a past activity, so now you're adding income to someone and not giving benefiting yourself in the current year. It's about implementation.
John Tripolsky:Not to mention their kid's 6 months old. So what what's your kid gonna do at 6 months old? Which ironically that and we don't have to talk on this at all, but I hear that there was in certain states now. I don't know if it passed or something. I don't think it was on a federal level about children and, partaking as far as for, like, influencers on social media.
John Tripolsky:Right? And then their parents or guardians not being able to withhold or kind of take all that income generated from them. It has to be held until they're 18. Did you hear anything about that by chance?
Chris Picciurro:No. I have fine now.
John Tripolsky:It was super interesting, and it it it makes absolute sense. Right? So you're not really, like, alienating your children, and then they get nothing because you wanna go to the casino and burn it every day. But, yeah, we'll save that for a later later topic. Let's keep track here.
John Tripolsky:We'll keep it short for the little ones.
Chris Picciurro:So no. And then so the other advantage would be there's a special rule for children certain children being exempt from Social Security and Medicare tax. I'm gonna talk about that in in the implementation part. So that's another advantage. And the parent could take a full deduction for the wages paid to a child as a business expense.
Chris Picciurro:So there are a lot of benefits. The other advantage benefit is the child gets that feeling of actually earning money instead of just some, here you go. Here's a couple bucks here. They worked for it. They earned it.
Chris Picciurro:So those are the benefits of paying a child. Now let's talk about the implementation part. What what needs to be done to make this legal and ethical? First thing is it has to be legitimate employment. So the child must perform, like, bona fide work for their age and responsibilities.
Chris Picciurro:So if you have a 14 year like, I have a 14 year old. She she went with me to an event in Fort Walton Beach, Florida this summer and helped me hand out materials to people. She spoke to a lot of people. She actually spoke to adults quite a bit. She handed she had a stack of my business cards, and she just basically helped me with that event.
Chris Picciurro:She she, there was no mouse or there's no clicker for so she clicked through the slides when I cued her too, and she was really truly help me. So, that's a bona fide work. Now is that worth $10,000 for that presentation? No. It's not.
Chris Picciurro:But you have to pay a legitimate amount. So but typically a 14 year old could help with mailing and data entry and and office filings. Also, and I mentioned this a second ago, the person needs to pay reasonable be paid a reasonable compensation. So for the 14 year old doing the office filing, mailing, etcetera, you know, maybe they get paid 10, 12, $15 per hour depending on where you live, but not $1,000 per hour. That would be just abusive.
John Tripolsky:And I'm sure that happens all the time too where But also. If they catch me, I'll come up with a story.
Chris Picciurro:Oh, gosh. Okay. Exactly. Something reasonable has to be paid. Also, documentation.
Chris Picciurro:Whatever you expect from other employees of the company, you should expect from your child even if, you know so do they keep time sheets? Do they record payments? You know, having an actual payroll system to pay these folks instead of slipping them some cash? What did they do as far as tasks performed? Do do we have them actually fill out the payroll tax w nine, which you should?
Chris Picciurro:Is the business issuing w twos to the per to the child and filing quarterly tax payments tax filings. If you wanna be a duck, you gotta walk like 1 and quack like 1. So proper documentation's super important. Now if the child is an employee, they have something called earned income, and the advantage of earned income is they can potentially contribute to a retirement account. That's my cherry on top I'm gonna I'm gonna put on the end, and potentially get employee benefits.
Chris Picciurro:So that's an advantage. And then the payroll taxes and exemptions. This is a huge implementation opportunity and advantage, for people that are sole proprietors or partnerships where both parents are partners. So, John, let's assume you are taxed as a sole proprietor, and this includes if you're a single member LLC, which is a disregarded entity, or taxed as a partnership where both parents are partners. If you hire a child that's under the age of 18, you still file a w two and you still withhold payroll tax federal tax, although they probably won't have any federal tax to be withheld, but they are exempt from FICA taxes, meaning they're not paying in the Social Security and Medicare tax.
Chris Picciurro:So as an example, John, if you're you make a $150,000 in your business, you have 2 children, both children make $10,000 legitimately on a w two, you shifted $20,000 of it expense off of your return and under their return. They're gonna pay no federal tax, and they're gonna pay no FICA's, which is Social Security or Medicare tax. If your tax rate's 25% and you're paying, let's just round it, a 15% FICA tax, your marginal tax rate is 40%. So you paying them that $20,000 reduced your tax by $8,000. I know that's just a quick and dirty example, but that's the power of having minor children that are exempt from the FICA taxes.
Chris Picciurro:So but now keep in mind, s corps and LLCs taxed as corporations, or partnerships where the child's parents are not the only partners, thus this does not apply. So a lot of times we have clients that are us, corporations, that do hire children, which is fine. There still could be a really good use case for that, but they're gonna pay the Social Security and Medicare tax.
John Tripolsky:Makes sense. Makes sense. So it's and I think, Chris, when you describe that, if anything, it really outlined, like, the benefit of it. Right? So you're not it's not tax avoidance in a negligent frame.
John Tripolsky:Again, it's a
Chris Picciurro:strategy. Right? So it's it's there. Oh, absolutely. It it happens all the time.
Chris Picciurro:I mean, if we look at I'll let I have an example. Just someone in the teaching tax flow community. It's a small landscaping business. They've got they're up in Michigan, so it's seasonal. Most of those landscapers up in Michigan, John, you know, do do, plow snow in the wintertime, though.
Chris Picciurro:Chances are
John Tripolsky:your The grass isn't growing in December. Let's put it that way.
Chris Picciurro:It is not. But the chances that in this example, the it was it was someone that owned, a sole proprietor, owned the landscaping business. They employed a 16 year old child. Chances are you're not sending a 16 year old child out in a in a in an f 350 to move snow with a snowplow. A lot of bad can happen there.
Chris Picciurro:But in this case, the child worked 20 hours a week in the summertime. They paid him $12 an hour, so they made $24100 during the summer. I think the child would have liked to make more money, but that's reasonable. So dad, will who we'll remain nameless, took a $24100 deduction off of his and his wife's tax return, as a business expense. Spanky, who we're gonna hide the name, made $24100 exempt from the FICA tax, received a $24100 w two, but does not have to pay any federal tax on that.
Chris Picciurro:So dad and mom are happy, Spanky's happy. And here's the nice thing, here's the cherry on top, other than being Social Security tax exempt. Dad and mom say, you know what, Spanky? We love you a lot, you're only 16. We think tax rates are gonna go up in the future.
Chris Picciurro:We're going we're gonna put you're gonna take that $24100 that you earned, and you're gonna contribute it to a Roth IRA. That Roth IRA is going to grow tax free. And if Spanky puts that $24100 into the Roth IRA, there's no tax deduction for it, He's in good shape. Now here's a here's something that gets tripped up though, Johnny t. Remember, to contribute to a Roth IRA, you need to have what's called earned income.
Chris Picciurro:So you can't just contribute to a Roth for a child that doesn't have w two h's. You have to have that earned income. So Spanky's got 44 years before he's 60 years old. Let's assume Spanky gets an 8% return on his investment over the next 44 years, okay, that means that that money is gonna double every 9 years, and that means that money is gonna double almost 5 times. So $25100 doubled 5 times is a lot of money.
Chris Picciurro:A lot of money. In fact, it's almost $77,000. So when now what will that pay buy in 44 years? I really don't know, but that's a significant amount of tax free tax deferred income and tax free distribution. So that's the power of some of these strategies.
John Tripolsky:And it's not that hard to execute, implement, we'll say, as long as you know the right way to do it. It's not just, you know, putting cash in an envelope, giving it to your kid or not giving it to him and say you did, do more. And then come tax time, you're like, oh, yeah. Yeah. I I gave him, you know, 9, 10, 12, 13, 14 grand throughout the year, and yeah, cool.
John Tripolsky:Yep. It was done. That's it. Like you said, it has to be documented. I think one of the things that, Chris, tell me if I'm wrong.
John Tripolsky:Right? It it does really have to go through a kind of a standardized, if you will, payroll process. Right? So, like, we've talked with the guys at Gusto, which are great with it.
Chris Picciurro:Right. No. And that's what I was gonna conclude with. Implementation is important. So first step, you has to go through w 2.
Chris Picciurro:Okay? The the people at Gusto are are are really amazing. They were on our podcast, and that's not why they're amazing. They're they're on our podcast because they're they are amazing. They're not amazing because they're on our podcast.
Chris Picciurro:If you wanna implement the strategy, please reach out to us. Okay? Because a lot of times, their Gusto has provided the Teaching Tax Flow community with special discount codes. Right now, I think it's, like, a 25% off. I just we just had 2 clients take advantage of that in the last week.
Chris Picciurro:Don't go in blind. I will connect you with the with those folks or John. And, and then as far as the Roth contributions, work with a financial advisor that you trust. If you need a recommendation, the teaching tax flow team is happy to provide that to you. But implementation is the key, remember.
Chris Picciurro:So if you think this might work for you, reach out. Join the fun.
John Tripolsky:Chris, great topic here. I'm glad we we dove into this. I know we've we've talked about this probably well over a dozen times or referenced this strategy on our podcast. I was kinda mentally going through a list as we were chatting. I can think of at least 6, 7 of them where it's come up.
John Tripolsky:The the one that we did on payroll, well, obviously, with the guys at Gusto Will was incredible. Diving into that, they're a really easy DM. This is not a paid promotion of them by any stretch of mednation. Very easy to use. The worst thing you wanna do is get in, start using a platform that's just outdated and a pain in the rear to begin with.
John Tripolsky:But, yeah, you we we had some really good points here. Right? You cannot 1099 your children and do it that way. You cannot slip them cash. You cannot say, okay.
John Tripolsky:Well, I paid you, but I didn't. You have to do it right. Legitimate actual work that they can do. Again, a 2 year old is not driving around a snowplow truck. You know, a 6 month old is not skimming your rental property pool.
John Tripolsky:There's a there's a lot of stuff that's not happened. So take that into consideration. And the final one that I'll leave here. Right? And again, I have a 3a half year old daughter.
John Tripolsky:These little guys and gals get very expensive. So any opportunity that's out there to save some bucks, do it. Well, legitimately do it. But on that note, we will see everybody back here as always. Again, leave a review.
John Tripolsky:Subscribe here on the teaching tax flow podcast as we itch a little bit closer. Look up more inches. Couple more. We're almost there. 2 episode 1.
Disclaimer:So same time, roughly, different topic here next week on the show. See everybody soon. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney.
Disclaimer:Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer. The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.