Dr. Jim Dahle, a.k.a. the White Coat Investor, has tempted many a blogger by dropping oblique references to how he pays his children to model for his tremendously successful blog. There is great appeal in the idea that you might hire your children to work for your business; that their earnings, as part of a family business and while in a low tax bracket, could lower your collective overall taxable income; and that those earnings could be invested in a Roth IRA and compound tax-free for decades, or even potentially be stretched to provide for your as yet unborn grandchildren.
Like many WCI readers, I'd wondered about whether I might someday implement a child model plan for my kids. I even reached out on the Bogleheads forum to explore the idea of a child Roth IRA, and summarized the consensus in this post. Listening to WCI's podcast #51 was experiencing a long-held dream coming to fruition. He spilled the beans on how he pays his kids to model. Here's a recap:
- They are part-time employees of the White Coat Investor, LLC.
- Like any other employee he fills out W4, I9, and keeps a time sheet noting the hours they have worked.
- The IRS sends him a form every year asking what his child employee does for him: He fills out the form with each kids' date of birth, social security number, and writes the word "model" on the form, and that has sufficed.
- At year end he files a W2, W3, and gives a W2 to the kid.
- Each kid has to file taxes annually to report earned income.
- He makes a point that each kid has to do real work for a reasonable rate of pay.
- He says his online searches have demonstrated that a reasonable going rate for a child model is ~$100/hour.
What are the real benefits?
- It's a tax deduction to your business. If the only owners of the business are you + spouse and it's not a corporation or LLC, you don't have to pay social security or medicare taxes on their earnings (i.e., there are no payroll taxes).
- On earnings of up to $6000/year each kid pays no federal income taxes.
- This money is triple protected since it is not taxed to your company; is not taxed to you; is not taxed to the kids.
- You can put it into a Roth IRA and it will never be taxed again.
- You get the ancillary benefits of teaching your kids about working and investing.
I figured there is ample interest in how Dr. Dahle does this that other bloggers might appreciate having it summarized conveniently for future reference.
Comments 10
Thanks for this great summary, Crispy Doc!
I have often wondered about this and the feasibility of doing this in the future with my kids. Sounds like it could be doable. 🙂
Author
Word on the street is you’ve got a particularly good-looking kid, DMF. Maybe all that Hollywood living is rubbing off. Reminds me of a favorite David Sedaris bit from his wonderful Santaland Diaries, which is worth listening to as a podcast (free via This American Life, also available as audio book at many libraries; definitely needs to be listened to, not read).
Sedaris was working as an elf at Macy’s, and trying to engage a young girl waiting in a long line to see Santa, tells a young girl: “You are so beautiful! You must be an actress!”
To which the girl replies, “Yes, but I also write and direct.”
LOL! I love David Sedaris. He’s hilarious. I’m going to check the Santaland Diaries out!
Author
Be sure to get the version read by the author – it’ absurd and brilliant.
Hey CD!
Good to know tax laws not much different on both sides of the border. We have been paying our children for years now. It saves us from hiring another non-family employee in my husband’s practice. Works extremely well. Both kids have learn a lot of medicine from filing and dealing with patients alone.
And yes, it goes directly to paying for their university expenses and tax free savings accounts.
We plan to allow our kids to use our tax free accounts when we start drawing our retirement accounts in 15-20 years. They can SWR a portion while we are alive. We should not be needing those accounts and I am sure it will be helpful to them when they are in their 30 or 40’s.
Author
Dr. MB,
Your plan is well thought out, and like much that you have done, ahead of its time.
I only hope we’ll be in a similar position in the future to leave our kids that head start, both for their education and for their housing security. In a HCOL state like California, if they stay near us, they’ll need the help.
Fondly,
CD
Thanks for the recap. That definitely is tempting for sure especially given the model rate you listed.
Do you think the model expense can only be a certain percentage of the website profit? Ie if your website has only made $100 would the IRS get on you for blowing it all on paying your kid 1 hr?
Also I am curious since a lot of physician bloggers choose to remain anonymous. Does this put a crimp in the plans for using your kids as models?
Author
I have the kids lined up to officially model for pay the day I make a decent buck on my site, but that day is not even remotely here. I’d need to make a few grand before I’d feel comfortable doing that, and I would not make a profit and spend it all paying my kids modeling fees. By the time you are WCI or PoF successful, I feel you can do this without worry since the modeling fees you pay are small relative to your overall blog income.
I would not feel comfortable theoretically explaining to the IRS that of the $5k I made in a year, each kid was paid $2.5k. (For the record, this site has made exactly $100 at time of writing in nearly 2 years of existence).
Until success hits numbers big enough for me to feel comfy, this is an interesting intellectual exercise waiting for an opportunity to be put to use.
Keep me posted if you decide otherwise!
My grandaughter modeled as a child….at what age can she get her income for modeling? She is 15 now
Author
Hi Sergio,
Accessing the modeling payments has more to do with how the parents opted to manage that income. If it was deposited under a UTMA account (stands for Uniform Transfer to Minors Act) account, the funds are deposited for the child’s benefit and the child can access them at the age of majority, which varies by state from 18 to 21. If the funds were deposited in a Roth IRA, the principal can be withdrawn tax-free after 5 years (the interest can also be withdrawn but incurs a tax penalty in addition to payment of income taxes at the kid’s marginal tax rate). So access is dependent on what vehicle the parent or guardian chose to deposit the funds.
Hope this helps!
CD