Hiring Your Children: A Tax Planning Guide for Physicians
- Feb 6
- 4 min read
Let’s be honest, your kids probably already think they run the house. Why not make it official and put them on the payroll?
Hiring your children is one of the most underutilized tax planning opportunities for physician business owners. Beyond the obvious benefits, like teaching them the value of a dollar and showing them the ropes of your practice, it allows you to shift income from your high tax bracket to their significantly lower one.
While it sounds great on paper, the execution requires precision. The IRS pays close attention to family employment, so you need to do this the right way. Here is how you can help your kids build wealth while lowering your family's overall tax burden.
Why Hire Your Children?
The primary financial motivation is simple: Income Shifting. As a high-income physician, you are likely in a high federal tax bracket. Your minor children, however, typically have little to no income. By hiring them, you can pay them wages that are deductible to your business, but tax-free (or low-tax) to them.
Leveraging the Standard Deduction
For the 2026 tax year, the standard deduction for a single filer is $16,100. This means your child can earn up to $16,100 and pay $0 in federal income tax.
You save: Deduct their wages from your business income, reducing your tax bill at your marginal rate.
They keep: They receive the income entirely tax-free up to the standard deduction limit.
Payroll Tax Exemptions (Entity Matters)
This is where the structure of your practice matters:
Sole Proprietorships & Partnerships: If your business is unincorporated and solely owned by the parents, wages paid to children under 18 are exempt from Social Security and Medicare taxes (FICA). Wages paid to children under 21 are exempt from Federal Unemployment taxes (FUTA).
Corporations (S-Corps & C-Corps): If your medical practice is an S-Corp (which is common for many physicians), you do not get the FICA or FUTA exemptions. Your child is treated like any other employee for payroll tax purposes. However, the income tax savings at your marginal rate, often make this strategy worthwhile despite the payroll taxes.
The Roth IRA Opportunity
The immediate tax savings are excellent, but the long-term wealth building is where the magic happens. Because your child now has earned income, they are eligible to contribute to a Roth IRA.
2026 Limit: They can contribute up to $7,500 (or 100% of their earnings).
Since their tax rate is likely 0% right now, a Roth IRA can be a highly efficient vehicle. They pay no tax on the money going in, and the money grows tax-free for decades. By starting in their teens, they benefit from 40+ years of compound growth before retirement.
The Rules: Keep It Legitimate
The IRS is vigilant about parents paying children for "doing chores." To survive an audit, you must treat this as a legitimate business relationship.
1. Real Work for Real Pay
Your child must perform necessary tasks for your business.
Valid Tasks:
Filing, shredding, cleaning the office, social media management, data entry, or modeling for your website.
Invalid Tasks:
Household chores, walking the family dog, or "consulting" on your marketing strategy at age 7.
2. Reasonable Compensation
You must pay them a market rate for the work they do. You cannot pay a 14-year-old $100 per hour to shred paper. If you would pay a stranger $15/hour for the task, you should pay your child $15/hour.
3. Proper Documentation
Treat them like a real employee:
Paperwork: Have them fill out a W-4 and I-9.
Payment: Pay them via check or direct deposit, not cash.
Tracking: Keep a detailed timesheet or log of hours worked and tasks completed.
Reporting: Issue a W-2 at the end of the year.
Note: You cannot pay your child for "personal services." The work must be directly related to your medical practice or business.
The "Kiddie Tax" Warning
Be careful not to confuse earned income (wages) with unearned income (investments). The "Kiddie Tax" applies to unearned income (like dividends or interest) over $2,700 (for 2026). Wages paid for legitimate work are earned income and are not subject to the Kiddie Tax.
Bottom Line
Hiring your children is a powerful tool in your tax planning arsenal. It requires strict adherence to labor laws and IRS rules, but the ability to shift income and jumpstart your child's retirement savings is unmatched.
Don't wait until December to set this up. Proactive planning is key to ensuring you have the documentation and payroll history to support the deduction.
Disclaimer: This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.
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