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.