Keep it in the family to capitalize on tax incentives
Some veterinary practice owners hesitate to employ family members, but offering jobs to those closest to you can actually wield big tax benefits. You may be able to turn high-taxed income into tax-free or low-taxed income, achieve social security tax savings (depending on how your practice is organized), and even make retirement plan contributions for your child.
Here are the key considerations for employing a child:
SHUFFLING YOUR INCOMEYou can capitalize on tax-free or low-taxed income by shifting practice earnings to a child as wages for services he or she performs. To deduct the wages as a business expense, the child must perform legitimate work and the wage must be reasonable for the duties assigned.
For example, imagine you own your practice as a sole proprietor and you're in a 35 percent tax bracket. You hire your 17-year-old daughter to help with office work full time during the summer and part time in the fall. She earns $5,700 during the year. You would save $1,995 (35 percent of $5,700) in income taxes at no tax cost to your daughter, who can use her $5,700 standard deduction for 2010 to completely shelter her earnings. You could save an additional $1,750 in taxes if you could keep your daughter on the payroll for a longer period and pay her an additional $5,000. She could shelter the additional amount from tax by making a tax-deductible contribution to her own IRA.
SAVING WITH SELF-EMPLOYMENT TAX
If your practice is not incorporated, you can also save self-employment (social security) tax dollars by shifting some of your earnings to a child. That's because employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent.
For example, let's say a sole proprietor practice owner who usually takes $110,000 of earnings from the business pays $5,700 to her 17-year-old child in 2010. The veterinarian's self-employment income would be reduced by $5,700, saving her $165.30 (the 2.9 percent portion of the self employment tax she would have paid on the $5,700 shifted to her daughter).
Your practice also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. For example, if you offer a simplified employee pension, you can make an SEP contribution for your child up to 25 percent of his or her earnings (the 2010 limit is $49,000). Participating in the SEP won't prevent your child from making tax-deductible IRA contributions as long as his or her adjusted gross income is below the level at which deductions for IRA contributions begin to be disallowed. For 2010, that figure is $56,000 for a single individual.
Veterinary Economics Editorial Advisory Board member Gary Glassman is a partner with accounting firm Burzenski and Co. in East Haven, Conn.