top of page

Hiring Your Kids as Employees for Your Physician Private Practice or Business, including Tax Advantages

If you own a medical private practice or other small business, hiring your kids as employees can offer tax advantages and savings for both you and your children. Not only can you deduct their earned wages, which helps reduce your business’s taxable income, but it allows them to start investing at a young age, jumpstarting their compounding growth potential, especially in a tax advantaged retirement account such as a Roth IRA.


While this can be a great advantage for entrepreneurial physicians, there are certain rules to know and follow, as the IRS understandably has regulations when it comes to employing your children to prevent people from using this as a tax loophole. “Hiring” your two-year-old child to help out in the front office is a fast track to getting audited -  please don’t try to do this! These should be legitimate jobs that they legitimately perform.


We’ve seen confusion over the years in our physician Facebook groups on how this works and what you should do to make sure you document this work appropriately and stay out of trouble. Below, we cover the advantages and disadvantages and what rules to pay attention to, in order to help you save on taxes the right way. Please note that we are not tax professionals, and this article is intended to help you get started with learning about the topic, but you should consult with licensed expertise prior to making any decisions based on what you read here, as rules can change and there are often nuances based on location and entity type.


Disclosure/Disclaimer: This page contains information about our sponsors and/or affiliate links, which support us monetarily at no cost to you. These should be viewed as introductions rather than formal recommendations. Our content is for generalized educational purposes.  While we try to ensure it is accurate and updated, we cannot guarantee it. Rules/laws can change frequently.  We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.


Advantages and disadvantages of hiring your kids as employees for your small business for tax savings

Article Navigation



Resources for physicians hiring a child as an employee


If you need software to help process and track your payroll, Gusto can help. Gusto is highly reviewed by many of our members, and includes options for benefits. Check them out using our affiliate link.


Looking to dive deeper into small business finances and taxes? Explore additional PSG educational content, including:



What is the advantage of hiring your kids as employees?


There are a few different advantages to hiring your kids as employees.



Advantages for you as a small business owner


As a small business owner, you will be able to take a deduction against your business’s income, reducing the amount of the income that is taxable, at least for federal income taxes. Rules by each state may differ.


Many small businesses are set up as pass-through entities on a tax basis. This means that all the income you make from the business is treated as personal income on your taxes. The exception is usually certain types of corporations.



For high-income earners, like doctors, in high marginal tax brackets, this can add up to significant savings, especially as your children grow older and you’re able to expand their work hours and roles within the company.


In addition to saving on income taxes, depending on the type of entity that you have, you may also pay less in other taxes as well.

  • Payments for services to a child under 18 years of age are not subject to Social Security and Medicare taxes, saving you 7.65% of their income in employer taxes*

  • Payments for services to a child under 21 are not subject to federal unemployment taxes (FUTA), which can save you 6.0% of the first $7,000 they make a year (as of 2024)*


* These rules differ depending on the type of entity of your company, so make sure they apply in your situation before setting up payroll for your kids. In general, you do not have to pay payroll taxes on your children’s income if your business is taxed as a sole-proprietorship, a single member LLC that is taxed as a disregarded entity, or an LLC taxed as a partnership, but owned solely by you and your spouse. However if your business is taxed as a corporation (for example, S-corporation, including an LLC filing as an S-corporation), as a general rule you must pay payroll taxes on income paid to your children. Please double check this with your accountant, as some accountants specializing in tax strategy do have workarounds for this, but that is beyond the scope of this article and the legality of it should be confirmed with a certified tax professional.



Advantages to your kids in hiring them as employees


There are several benefits of having your children work for your private practice or other small business.


One of the most notable benefits is additional tax advantages for them. If they make under the standard deduction amount annually, all their earned wages will be tax free.


In addition, having an earned income allows them to open up and invest in a Roth IRA at a young age through a custodial account. Every dollar they invest into a Roth IRA or that you invest for them on their behalf (contributions cannot exceed what they earn and report on their taxes) grows completely tax free, giving them a jump start on their retirement planning. Since the IRS limits how much you can contribute annually into a Roth IRA account ($7,000 as of 2024), starting young can be a huge tax advantage over the course of their life. This can result in many decades of tax free growth that can grow to a 7 figure amount by the time they reach retirement.



Above the tax benefits, your kids can also benefit from:

  • Learning a strong work ethic at a young age

  • Earning work experience while building their first resume

  • Understanding the value of a dollar (and what it takes to earn one)

  • Getting past the sticker shock of what paying taxes look like with their first paycheck before they’ve already budgeted for far more than they actually bring home as an adult



Disadvantage to hiring your children as employees


Depending on what you already have in place, there may be some logistics you need to set up before hiring a child as an employee.


If you don’t already have one, you will need an Employer Identification Number (EIN) and likely a state tax ID for processing payroll and withholding applicable taxes.


If you were originally working as a self-employed individual, you may not have been filing quarterly and annual payroll returns. Employing your children would force you to add these to the administrative tasks of your small business.


While you can save on many federal taxes, there’s a chance you may also need to have workers compensation insurance covering them. Rules on who has to carry workers comp can vary by state.



IRS rules for hiring your kids as employees


To take advantage of the tax benefits of hiring your kids, you’ll want to make sure you follow the IRS guidelines carefully. The IRS has a small section on their website covering what to know about hiring family for help. Below, we cover some of the key things to keep in mind so you don’t have to hunt and search their site.


5 tips to hiring your kids as employees for your business

Make sure your children are eligible under federal and state law


Generally, you can hire your children to work for a business that you (or you and your spouse) own entirely. If you are a partner in a practice, they may not be eligible to work for you, depending on their age.


Look into both federal and state child labor laws in your area to ensure you’re in compliance before onboarding your child as an employee. Different states have different rules, and rules on the federal level can differ depending on the industry. There may be restrictions on how much your child is allowed to work as well.


The US Department of Labor website and their Wages and the Fair Labor Standards Act are a great resource when looking into the federal side of employment regulations. Your state’s department of labor site should be able to help you navigate local rules.


When in doubt, we always recommended checking with a local accountant or tax professional. Many can also help you get payroll set up and processed, if needed.




Give your child an actual job


We often see poor advice telling physicians to just put their young children on payroll and funnel wages to them. In order to legally hire your child as an employee, they need a job that covers necessary work related to your business.


“Necessary work related to your business” is key here. While you can likely include cleaning and landscaping work around the building as job duties for your business, scrubbing the toilet or putting away the dishes at home don’t qualify. The duties performed and paid through the business must be for the business.


A great litmus test is that if you wouldn’t hire someone else to do it for the business, you can’t count it toward your kids’ hours and pay.



Make sure your kid performs the job you give them


Whatever you consider as part of your child’s role, they need to actually do. So it’s important that the roles assigned and performed are age appropriate. For example, your seven-year-old can’t be in charge of your website, unless they are a true internet prodigy. But they might be able to help with some simple cleaning and restocking around the office, or serve as models for social media pictures.



Pay them a reasonable wage


While most kids would love to earn $50/hr to help answer the phone or update charts, if you wouldn’t pay a stranger off the street a certain rate to perform the job duties you compile above, don’t pay it to your kid.


Also don’t underpay them to keep them below the standard deduction amount to skirt on income taxes - or for any other reason.


Make sure you’ve spent a little time researching what you would have to pay someone you hired organically to perform the same job, then pay your child accordingly.



Keep records of everything


Documentation is always good when it comes to taxes and the IRS. A few different areas of records for your kids and any other employees or contractors:


  • Put together a job description for each child you hire, detailing the duties they perform for your business

  • Keep track of their hours, either through a payroll system, punch clock, or paper timesheet that they fill out, documenting their hours worked

  • Have a W-4 and I-9 on file for each kid you employ, just as you would any other employee (Pro tip: make sure you keep these two forms in separate areas/files to keep the IRS happy in an audit) 



What can my child do for my small business?


Given the warnings above, we sometimes see questions in our online physician community asking what type of roles children can legally do for a small business. In the pre-digital charting age, children of physicians could often be a huge help putting charts together. Now, depending on your children’s ages, some roles we commonly see references for kids include:

  • Other general filing, shredding, and recordkeeping

  • Janitorial and cleaning work and organizing

  • Answering the phone, scheduling appointments, and other administrative assistance

  • Assisting with billing and coding, including collections, and other data entry

  • Helping manage the company’s social media accounts, and even modeling or creating content for it

  • Inventory management and restocking of supplies

  • General IT support (setting up new computers, helping with minor technical issues, etc.)

  • If they are able to drive, running errands for the business

  • Working at the practice in some capacity



Does employing my kids affect my retirement plans?


We are big advocates for tax-advantaged retirement accounts like the solo 401(k). As the name implies, a solo 401(k) is meant for a small business where only you (or you and your spouse) work.


Most kids won’t be working enough hours to count as “full-time” employees eligible for a plan, so it wouldn’t be an issue. If your older teenage child will be putting in a lot of hours, however, you may need to dig a little deeper before bringing them on the payroll. Make sure that your plan is set up so that eligibility starts above the age of 21 years old.




Conclusion


Hiring your child can be a great way to provide them with practical work experience and help them get a jumpstart on saving for retirement. It can also provide you with tax advantages as their employer. Just make sure you follow the guidelines above to keep the IRS happy when adding your kids to the payroll, and before you take any advice from this article, confirm with an accountant, as rules can change and as there may be nuances to entity structure, location, and otherwise. 


bottom of page