Tax Benefits Of Employing A Spouse Or Child In Your Practice
What are the real benefits of having your spouse “work” for the practice?
Thanks!
John Henahan, OD
Hi John,
To answer your question, I consulted J.R. Armstrong, CPA of May & Company, LLP, in Vicksburg, MS, (601.636.4762). His firm does tax and accounting work for ODs in 29 states.
Comments From A CPA On Employing A Family Member
There are several benefits to hiring a spouse or child. They all depend on the business entity in which an OD operates. For instance, a sole proprietor has different tax consequences of hiring a child than if he or she were operating as an S-Corporation.
One item to note in all circumstances, the level of compensation must be ‘reasonable’ to the child or spouse and good recordkeeping is an absolute must.
Also, the tasks that your child or spouse are charged with must be consistent with their age and skill level. You can’t reasonably put your ten year old daughter on the payroll for the purpose of maintaining your payables. But, she certainly may be a great sweeper or duster!
Some General Guidelines To Consider
• If an OD operating as a sole proprietor employs a child who is under the age of 18, the child is generally not subject to payroll taxes. This increases the OD’s practice net (albeit in a small amount, but in my opinion, every hard earned penny is important) and also increases the take-home pay of the child.
Additionally, the OD will have shifted income from his or her tax bracket to the child’s bracket, which we can expect to be lower. On top of that, the child could put the earnings into an IRA and mitigate any taxes due on the wages (or more correctly, defer the taxes until the eventual withdrawal from the IRA).
• Employing one’s spouse has certain benefits as well. One big reason to employ a spouse would be if he or she doesn’t have any other form of employment. This will allow the spouse to earn credits towards social security benefits.
• Employing a spouse may also save self-employment tax for a self-employed OD.
• Employing a spouse may help you qualify for the child care credit. In order to receive this credit, both spouses must have earned income.
• An intangible benefit to hiring a spouse or child is that you know they have a strong personal interest in the success of your practice and will be more inclined to go the extra mile when necessary.
Closing Thoughts From Jerry
Some practice owners work well on a daily basis with their spouses. Some don’t. It often depends on who is the Indian and who is the Chief. I recommend that you put the health of your marriage ahead of potential tax savings.
I totally agree with J.R.’s recommendation to pay market rates, particularly to your spouse. If you overpay the spouse, that artificially lowers the net, which in turn will lower the appraised value in a sale or partnership scenario.
On the other hand, if your spouse performs services such as bookkeeping for below market wages, it makes your net look higher that it really is.
I hope this helps!
Regards,
Jerry Hayes, OD
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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Hey Jerry, This may be a
Hey Jerry,
This may be a little off subject, but it still concerns employment.
I have a friend that works for a OD with several offices. He works six
days a week, 10 hours a day. His employer pays him as a sub contractor.
I showed him the “IRS independent contractor test” and suggested that
he take a closer look at his situation. Does he have anything to be
concerned about as the employee/independent contractor?
Can the 10 year old put their
Can the 10 year old put their earnings into a roth IRA?
Absolutely, says J.R.
Absolutely, says J.R. Armstrong, CPA!
This is a great idea because the child is now likely in the lowest tax brackets.
Paying the tax on the earnings at a low tax bracket now wouldn’t be the worst thing in the world. But, future qualified distributions from the Roth will be tax-free, at a time when one would expect the child to be in a higher tax bracket.
There is an exception if the child is in the fortunate position of having an Adjusted Gross Income over $101,000.
In that case, the amount he or she could contribute to the Roth would get phased out. If the child had an AGI of over $116,000, they could not make a contribution.