Tax Benefits of Hiring Your Child to Work in Your Practice

A reader who hires his high-school aged kids to work at his medical practice asks whether he needs to withhold taxes and report their income, as he would for his other employees.

Q: I hire my high-school aged son and daughter to work in my office doing chart filing and data entry. Do I need to withhold federal taxes from their paychecks, or report their income on the quarterly and annual tax forms?

A: Hiring your children can be a smart decision for self-employed physicians. Children under age 18 (or full-time students between the ages of 19 to 23) who work in their parents’ practice aren’t subject to Social Security, Medicare or federal unemployment taxes, depending on the way your business is structured. Hiring a minor child to work in your practice is also considered a deductible business expense, which lowers the parent’s gross income.

There are only two types of business structures, however, that are allowed to pay children wages without having to pay employment taxes: A sole proprietorship or a husband-and-wife partnership. If your business is incorporated in any way, the child is considered an employee of the corporation, so employment taxes are owed. Also, if the partnership includes other partners who are not a parent of the child, the taxes must be paid.

Note that if you pay your children more than the standard deduction ($5,700 for individuals in 2010) they could be subject to income-tax withholding, though the withheld funds are generally returned to the child as a tax refund the following year.

You also must report the wages on your payroll tax forms, and prepare W-2 Forms for the children, as you would for any other employee working in your practice.

If you’re unsure whether or not your child -- and your practice -- qualifies for the tax breaks, be sure to check with your tax advisor first.

HAVE A QUESTION FOR "ASK THE EXPERT"? Email Physician's Money Digest at tcullen@hcplive.com.