The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 94 - Family on Hiring Strategies: What Instagram "Gurus" Won't Tell You
The strategic employment of family members offers significant tax advantages when implemented correctly, but widespread misinformation can lead to costly mistakes and potential audit issues.
• Pay family members based on work performed, not automatically the standard deduction amount
• Family Management Companies are problematic under scrutiny; consider legitimate alternatives like rental property employment
• Consider hiring spouses, parents, and siblings, not just children, to maximize tax benefits
• Maintain proper employment documentation including job descriptions, time logs and regular payroll systems
• Leverage family members' unique skills instead of limiting them to menial tasks
• Explore advanced strategies like education tax credits when hiring college-age children
Message me the word "workshop" with your email for free access to our detailed workshop on hiring family members. Visit prosperapcpa.com/apply to learn how our experts can help maximize your tax savings strategy.
Your tax savings is going to give you all your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free. He was a limited partner, so there was zero risk and he really liked you. This was one of our more risk adverse clients. All right, welcome to the show.
Speaker 1:I always love nerding out with experts in the world of money and finance. Hire your kids. It'll save you a ton of money in taxes. Right, you may have heard of this strategy and a lot of popular Instagram posts on this topic, but there's a lot of misinformation out there on social media, absolutely so you're going to be very misled if that's the only place you're getting your facts from. So here are six key points I want you to keep in mind and myths that we can debunk on what you need to know about hiring your family. Also, I'm doing a workshop on hiring your family. Just message me the word workshop with your email and I'll send that over to you for free. Now let's get started.
Speaker 1:Number one a lot of these gurus are telling you pay your kids the standard deduction. They pay no taxes, just pay them $14,600. If you're listening in 24 or that amount would be $15,000. They always say this here's how you get a write off and you don't pay any taxes. Pay your kids a standard deduction. Well, that is possible and it is true. Here's what I want you to keep in mind. You could pay them more than that. And why not? Because if they're in a $0 tax rate, yes, you can pay them. Sell them the standard deduction. They don't pay taxes on the first $14,600 or $15,000 in 2025. But if you pay them more than the standard deduction now, they pay a 10% tax. If you have the opportunity to legitimately pay them more than the standard deduction, you're still most likely shifting income from your tax bracket. So let's say you're in a 30% tax bracket and now you pay your children and they're paying taxes at a 10% bracket. Still, the net effect is an overall reduction of taxes.
Speaker 1:So why not find the opportunity to pay them more than the standard deduction? It's not like this general rule and they have an allowance and you just pay them that much. We really got to pay them for the work that they do. So also, not only should we consider paying them more, we also might want to pay them less. Why is that? We have to pay them for the work they're actually doing. So if your six-year-old comes in and helps you sweep the floor once a month and you cannot pay that six-year-old for his or her cuteness, the cuteness doesn't really hold a lot of value in the marketplace. So if you get audited and they say you are paying your children the exact amount of the standard deduction, they're going to know something's a little fishy here and they're going to wonder where is the supporting evidence and how did you come up with that number? Don't tell them oh, this instagram guru told me that's what I pay them, so why not? You got to pay them for the work that they're doing, and if they aren't capable of doing $14,000 of annual work every year, then you can't pay them that amount. Next thing I want to discuss and this one's going to hurt okay, I'm going to get a lot of heat from this from some of our colleagues here, but we have to follow the law and just really observe what the law says.
Speaker 1:The family management company is a total sham of a transaction. I know you've heard all the other people preach and show you the charts and the line goes here and then here. There may be a trust here and a management company here. Now, let's think about this for a second. What does this family management company do? Is this really a legitimate business here? How many family management companies do you know? Were you thinking about hiring a family management company before you created one? If I google family management companies in in google, what do you think I'm going to find? Oh, oh, you're just going to start your own.
Speaker 1:Well, the thing is, it's a total sham transaction. It's really just meant to avoid FICA tax if you hire kids through your S corporation. So what these Instagram gurus are going to tell you to do is, as a workaround, you pay the family management company, which is a sole proprietor, which pays your kids, and now it's like you're hiring your kids directly instead of through the s corp. Well, you could try to get away with that, but here's the thing under strict scrutiny, we need to say that there's a bona fide business purpose for this entity and it's doing absolutely nothing at all. There's zero purpose besides the fact that it is simply to avoid the FICA tax, and that is your social security, medicare taxes and your food tax. So I'm so if we're going to really understand what we're talking about here I'm sorry to break it to you guys, but this family management company is a total sham. Now can you get away with it and do thousands of people do it? Yes. So if you've created your family management company and you're running it through and you haven't been audited, I wouldn't really be so scared. But I'm going to have to break it to you. This family management company is a sham. So here's what we can do. If we want to actually follow the law and recognize that this family management company is a sham.
Speaker 1:Here's what we can consider. First off, for some of you, you may find that this FICA tax is not so bad. Well, for one thing, your kid is paying into his social security benefits, which he will eventually receive Additionally, while we're concerned about the additional tax, for some of you high-income earners, the more you increase your wages of your company, the more you access the qualified business income tax deduction. So, while your FICA increases for your family, you may find that you actually get more of a QBI tax deduction. Maybe, depends on your circumstance. So it may not be all that bad. But here's a way that you can actually circumvent the family management company and not deal with the FICA tax trap of paying your kids out of the S-Corp, you can actually pay them from your sole prop. So if you own a Schedule C rental, if you have a rental property, you can pay your kids to participate in your rental activities. Now we're getting the tax deductions through your sole proprietorship income without having to create a fake family management company. You're hiring them through your legitimate Schedule E rental portfolios. Now we're in compliance and we're avoiding the FICA tax. You get both of those wins at the same time. All right, let's go into opportunity, or actually I would say let's go into another myth busting or misinformation.
Speaker 1:Topic number three here, which is only hiring your kids. So we see so many people talk about hiring your kids. Hire your kids, yes, there is a possibility, if they're under 18, to hire them and not pay FICA, and maybe it's most likely the kids don't pay any taxes. But don't stop at just hiring your children. You can consider hiring your sister, your brother, your mother, and there's still opportunities there. I hired my mom. She's in a lower bracket. I get the opportunity to shift money into that lower tax bracket. So you may find that a lot of these benefits of hiring your family don't just stop at the children. In fact, there are some instances where there are major tax opportunities to hire your spouse out of your sole prop, and so don't just stop at looking at the children. You can potentially hire your spouse to access some health-related benefits, some healthcare-related benefits and an HRA where you can actually write off more than your itemized deduction on your healthcare costs. So consider looking at the full picture here and you actually might find your spouse is a little bit more capable of performing work than your seven-year-old child.
Speaker 1:Okay, let's go into myth number four, which is just pay the kids the money, get the write-off. What they forget here is that they actually have to do the work. You need a job description, you need a time log and they have to be given performance reviews if that would be necessary for that position, and they have to be held accountable, because when you hire your family members, and especially if you're paying them the exact amount of the standard deduction in one transaction at the end of the year to get the write-off, you are likely going to be scrutinized. You need the supporting documentation to show that you've legitimately treated them as employees and properly accounted for the work they are doing and documented it as part of their compensation. Don't slack on the details here. Just because they are your cute little children, treat them as employees, especially when it comes to the documentation. You can still love your kids though. Okay, let's get into misinformation number six here, and this is a really good one.
Speaker 1:Misinformation number six is not just about paying them to do cheap work. Don't just have your kids do grunt work, shredding paper and cleaning your office. Try to tap into their greatest skills. There are so many other things you get your children to do, especially if they're teenagers. They can manage your social media. They can help you. If they're good with numbers, they can help you with some financial analysis, maybe some bookkeeping. Really tap into their greatest strengths and unique abilities to give them some actual real-world experience, to strengthen their understanding of what they can do in the real world and understand what you do. Don't just look at this as a tax savings opportunity. This may be an opportunity to connect greater with your family members and your children and develop them and help them in their path into the real world and understanding how they're going to contribute to society. All right, so it's not just about getting them to mop the floors here to get the tax write-offs. Let's really get them involved and develop the kids or anyone else you want to hire for that instance.
Speaker 1:Now, another thing I want to point out here is uh, we actually I want to backtrack to step number four, which we missed, which is that you don't have to pay them a get them on payroll. You do have to get your family members on payroll. Under best practice, if you're just throwing them cash while you could, maybe you get that to write off and some folks may be preaching that under best practice, ideally we have a proper payroll system that is, issuing them a w-2, so we are in compliance not only with the federal tax law, but with the state level tax law. Now, before we close this out, I gave you six ideas here, so here's how we're going to share with you the six ideas to overcome all the misinformation on hiring your family. One, you don't have to pay them the exact amount of the standard deduction. You pay them for what they're doing and it's okay to go over or under. You may actually see greater tax savings if they go over. Two, the family management company is a sham transaction, so consider hiring them through your rental portfolios or other sole props, or so consider hiring through your rental portfolios or other sole props or just pay them through your S corporation. Three you should run them through an official payroll system like gusto or ADP, for you don't have to just hire the children. You can hire your family spouses, children, mother. Five treat them as legitimate hires, job descriptions, time logs and hold them accountable. Six don't just make them do grunt work. Tap into their unique abilities to get the most value out of the people, just like anyone else you would hire. Do the same with your kids work. Tap into their unique abilities to get the most value out of the people, just like anyone else you would hire. Do the same with your kids.
Speaker 1:Now here's some other ideas before we close this out. We are exploring opportunities to use oil and gas. Get a tax deduction and actually gift the interest to the children. Shift it into the same tax bracket. Help finance your college. You may be able to access additional tax credits if they are in college to cover their educational expenses with the american opportunity tax credit. So you that may incline you to pay them well over the standard deduction to access those credits to get the tax savings.
Speaker 1:Really cool stuff there, and you may not qualify for that tax credit yourself if you make too much, another reason why we don't just stop at saying paying them the standard of deduction. And then another thing to consider here is we could potentially utilize the Augusta rule a little more easily here to rent out our homes to our businesses. In meetings with our families and with all these opportunities here, there's just so much to look at beyond the basic surface level information you're going to find on social media. So again, I want you to message me the word family or email me and give me your email in that message and I'll send you the workshop so you can get a little more details and inside scoop into some of our exclusive client workshops. And if any of this sounds interesting and you hung around for the full video and you want to learn more about how to maximize your tax savings and really win the game with seasoned experts, go to prosperalcpacom slash apply to see how we may be able to help you out.