Step-by-Step: How Dentists Can Put Kids on Payroll and Slash Taxes

As a dentist, you’ve worked hard to build your practice, serve patients, and create financial stability for your family. But when it comes to taxes, you may feel like the IRS takes more than its fair share. What if there were a way to legally redirect thousands of dollars each year away from the IRS and back into your household?

The good news: there is.

One of the simplest, most IRS-approved tax strategies for dental practice owners is hiring your children to work in the practice. When done properly, this strategy reduces your taxable income, builds wealth for your kids, and saves thousands of dollars each year. Even better—it’s easy to set up and maintain.

In this article, we’ll break down exactly how to do it step by step, explain why it works, and show you how this “kids on payroll” strategy can be a game-changer for your dental practice and your family’s financial future.

Why Put Your Kids on Payroll?

At first glance, paying your kids might sound like a gimmick. But this is a long-standing and legitimate tax strategy that accountants and CFO advisors recommend to business owners—dentists included.

Here’s why it makes sense:

• Income Shifting: You move money from your higher tax bracket into your child’s much lower (or even zero) tax bracket.
  
• Tax Deduction: Wages paid to your child count as a deductible business expense, lowering your taxable practice income.
  
• Wealth Building: Those wages can be directed into Roth IRAs or 529 college plans, growing tax-free over time.
  
• Family Benefit: The money stays within your household, whether you use it for education, savings, or daily expenses.
  

It’s not just about cutting taxes—it’s about building long-term family wealth.

The $15,750 Sweet Spot in 2025

The magic number for this strategy in 2025 is $15,750. That figure is the standard deduction for an individual taxpayer, including children.

Here’s what that means:

• You can pay each child up to $15,750 in wages.
  
• Those wages count as a deduction on your practice tax return.
  
• Your child does not owe federal income taxes on that money (because the standard deduction offsets it).
  
• In most cases, you avoid even having to file a federal tax return for your child.
  

Example: If your taxable income was $300,000, and you paid your 12-year-old $15,750 through payroll, your taxable income drops to $284,250. If you’re in a 39% combined federal and state bracket, that saves you about $6,100 in taxes.

Your child owes zero federal tax on that money. The only real cost is payroll taxes (Social Security and Medicare), which come to about 15%, or roughly $2,300. Net savings: around $3,800 per child.

Multiply that across two or three children, and you’re looking at $8,000–$12,000 in tax savings every year—money that stays in your household.

Step 1: Make Sure Your Kids Actually Work

The IRS rule here is simple: wages must be tied to real, legitimate work. This isn’t a free handout—it’s a job.

Examples of tasks your kids can do in your practice:

• Cleaning and organizing supplies
  
• Filing, shredding, or scanning documents
  
• Stocking patient rooms
  
• Vacuuming or taking out trash
  
• Modeling for marketing photos on your website or social media
  
• Helping with office projects (age-appropriate)
  

The work needs to be reasonable for their age and documented. For young kids, something as simple as appearing in practice photos is valid. For teenagers, basic office work is perfectly appropriate.

Pro tip: Create a simple task list and keep occasional photos as proof. If you were ever audited, you’ll have documentation that your kids really did work for the business.

Step 2: Add Them as W-2 Employees

The IRS expects children on payroll to be treated like employees, not contractors. That means:

• Add them to your payroll system.
  
• Issue a W-2 at year-end.
  
• Pay them consistently (monthly or bi-weekly looks better than one lump sum).
  

Some payroll providers charge a small fee to process these additional employees—usually less than $150 per year. That small cost is negligible compared to the thousands you’ll save.

Step 3: Decide How Much to Pay

The sweet spot, as mentioned, is $15,750 in 2025. That keeps your child under the standard deduction threshold and avoids federal income tax filing requirements.

If you pay more than that:

• Any amount above $15,750 becomes taxable to your child.
  
• They may need to file a tax return.
  

Most dentists aim to pay their kids just under that number to maximize benefits and avoid unnecessary filings.

Step 4: Handle Payroll Taxes

Here’s the part most dentists overlook: even kids owe FICA taxes (Social Security and Medicare) on their wages. That adds up to about 15.3% combined.

But there’s good news:

• The employer half of FICA (7.65%) is deductible as a business expense.
  
• So while you’ll remit payroll taxes, the net effect is much smaller.
  

On $15,750, the total FICA is roughly $2,300. After accounting for deductions, your net out-of-pocket cost is closer to $1,800–$2,000. Compared to the $6,100+ in tax savings, it’s still an excellent trade.

Step 5: Decide Where the Money Goes

Once the wages are processed, where should the money land? You have two options:

1. Your Own Checking Account
   
   • Simplest option—set payroll direct deposit to your family’s personal account.
     
   • You can then use the money for family expenses like groceries, utilities, or vacations.
     
   • IRS rules don’t require the money to stay in a separate account.
     
2. Your Kids’ Accounts or Investments
   
   • You can open custodial checking accounts for each child.
     
   • Better yet, use the wages to fund Roth IRAs or 529 plans.
     

Many dentists prefer a hybrid approach: keep the money in the family checking account for simplicity, but then transfer $7,000 per child into a Roth IRA each year.

Step 6: Maximize Wealth Building with Roth IRAs

This is where the strategy becomes incredibly powerful.

Because your child now has earned income, they’re eligible to contribute to a Roth IRA. In 2025, the max contribution is $7,000.

Why Roth IRAs are amazing:

• Growth is tax-free forever.
  
• Withdrawals in retirement are tax-free.
  
• They’re more flexible than 529s (can be used for education, first home, or retirement).
  

The math:

• Contribute $7,000 for your 10-year-old every year until they’re 25.
  
• At an 8% growth rate, they’ll have nearly $400,000 by age 25.
  
• If left untouched until retirement, that could compound into millions—completely tax-free.
  

This is the true wealth-building power of putting your kids on payroll.

Step 7: Keep It Audit-Proof

The risk of IRS scrutiny here is low—but not zero. Protect yourself with a few simple steps:

• Document the work your kids do.
  
• Keep time sheets, task lists, or photos.
  
• Pay regularly, not just once a year.
  
• Make sure wages are reasonable (don’t pay a 6-year-old $50/hour).
  

If you ever face an audit, these steps will show that your children were legitimate employees, not just a tax loophole.

Real-Life Impact for Dentists

Let’s put this all together with a real scenario:

• Dentist earns $350,000 in taxable income
  
• Pays three kids $15,750 each = $47,250 in payroll expenses
  
• Reduces taxable income to $302,750
  
• At a 39% marginal bracket, that saves about $18,400 in taxes
  
• After payroll tax costs (~$7,000), net annual savings = $11,000
  
• That $11,000 stays in the family and can fund Roth IRAs, 529s, or daily expenses
  

Over 10 years, that’s $110,000 in savings—before factoring in investment growth.

The Bigger Picture: Teaching Kids About Money

Beyond the dollars and cents, this strategy has another benefit: teaching your kids about money and work ethic.

• They see the value of earning a paycheck.
  
• They can start learning about savings and investing early.
  
• It opens conversations about taxes, budgeting, and financial responsibility.
  

For many dentists, this isn’t just about saving money—it’s about preparing the next generation for financial success.

Final Thoughts

Hiring your kids is one of the simplest and smartest financial strategies available to dentists. By following the rules, documenting their work, and paying them through payroll, you can:

• Save thousands in taxes every year
  
• Redirect money into your household
  
• Build long-term wealth through Roth IRAs and 529 plans
  
• Teach your kids responsibility and financial skills
  

It’s a win for your practice, your family, and your future.

Want the full breakdown of how this strategy works—and how to apply it to your practice today?

Listen to Episode 128 of The Dental Boardroom Podcast