Kids on Payroll – A Tax & College Funding Strategy Part 2

In this episode of the Dental Boardroom Podcast, host Wes Read, CPA and financial advisor at Practice CFO, continues the discussion on putting your kids on payroll as a smart tax and wealth-building strategy. This time, he dives deeper into how to maximize the benefits by pairing payroll with 529 education savings accounts and Roth IRAs.

Key Takeaways:

• Shifting income for tax savings:
  
  • Move income from a higher parent tax bracket to your child’s 0% bracket (standard deduction in 2025 is $15,750).
    
  • Saves roughly $3,000–$4,000 per child per year. Over many years, that adds up significantly.
    
• Practical execution:
  
  • Children can start as early as age 6–7 and continue through college years.
    
  • Create job descriptions and light documentation (e.g., photos, office work, modeling fees) to substantiate employment.
    
  • Use a modern payroll service (Wes recommends Rippling) to simplify compliance.
    
• How to use the payroll funds:
  
  • Deposit paychecks into the parent’s checking account (simpler than setting up child accounts).
    
  • Direct those funds toward:
    
    • A custodial Roth IRA (tax-free growth).
      
    • A 529 education savings account (tax-free growth + tax-free qualified withdrawals).
      
• 529 Education Plans explained:
  
  • State-administered plans with varying benefits Utah’s “My529” (Vanguard, low-cost index funds) is Wes’ favorite.
    
  • Benefits:
    
    • Tax-free growth and withdrawals for education.
      
    • Potential state tax deductions in some states.
      
    • High contribution limits.
      
    • Parent-owned accounts are more favorable for financial aid and offer flexibility to transfer funds among siblings.
      
    • Can cover not just college, but also K–12, trade schools, apprenticeships, and up to $10K in student loan repayment.
      
• Suggested split strategy:
  
  • After payroll and FICA taxes, about $14K remains per child.
    
  • Example: Fund $7K to a Roth IRA + $7K to a 529 plan, balancing retirement savings with education funding.
    
• Risk & compliance notes:
  
  • Wes has never seen an IRS audit on this strategy in 17+ years, but stresses proper documentation.
    
  • Pay a fair wage aligned with actual work performed.
    
  • Always consult your CPA if unsure.
    
• Big picture:
  
  • This is more than just tax savings it’s wealth building.
    
  • Combining small strategies like payroll, home office, auto deductions, and retirement plans can collectively cut taxes by 30–60% (or more) and accelerate financial independence.
    

Why This Matters:

By intentionally leveraging tax rules, you can redirect money that would have gone to the IRS into your kids’ education, retirement, or family wealth. Over time, these small wins compound into major financial independence.

Transcript:

Wes Read:  Welcome back everybody to another episode of the Dental Boardroom podcast. This one's gonna be a little bit of a quicker podcast. It is part two of the putting your Kids on Payroll. As a strategy for building wealth and also supporting kids potentially through college and perhaps some other support you wanna give them in their life by using the money they receive from the payroll.

Now, a couple things I wanna reiterate on this from the prior episode. You are essentially just shifting income in a higher tax bracket, IE, your tax bracket to a very low tax bracket or zero tax bracket from a federal income tax standpoint to your kids, and you typically want to do it. Between the ages of six or seven up to really the time they're going to or finishing college.

So you've got roughly about maybe, maybe 15 to 20 years there to put your kids on payroll, pay them the standard deduction, which in 2025 is 15,750, and you're gonna save somewhere around three to $4,000 per child by doing that every year. I've probably saved. 200 to 250,000 in taxes over the many years of doing this with my three kids.

And now there's also money in some 5 29 education savings accounts that I have for them. One of my kids just left Opt College this past week at UCSB here in California, and we are using that 5 29 money. So it, it has been a beautiful strategy. We never had a client really audited over this issue. I think it's a low risk issue.

We don't wanna abuse it. You do wanna have the criteria of job profile for your kids printed out somewhere. Maybe put some pictures around the office with them smiling for modeling fees, and maybe bring 'em in the office periodically to do a little bit of cleaning and learn some good work ethic as well.

Also, reiterating the need to have the kids' payroll deposited in your personal checking account. You could do their own checking account, but that's a pain in the butt. Do it in your own checking account and then it can be used to, you know, fund normal daily living expenses. Or my preference would be you used it to fund the, their Roth, their own Roth ira where you are the custodian of, it's called the custodial Roth IRA for your kids and or a 5 29 education savings account.

Now one of the things in my last episode, I don't think I really struck home with was. The fact that your kids, if you pay 'em the standard deduction and the standard deduction is that free sort of tax deduction any tax filer gets just for breathing in 2025. That's 15,750 is if your kids get paid that or less, they're not paying anything in federal income tax.

Zero. They're in the 0% tax bracket, then they put it in a tax free account. It grows tax free and therefore it ent that money entirely escapes the IRS ecosystem. And remember, you get a tax deduction for paying your kids. That's the benefit is you save about 3000 to $4,000 per child per year. So if you have three kids and you do it for 15 years, that's a lot of money you're gonna save.

And you can use a lot of that tax savings, that money that would've gone to the IRS. To go to your kids' IRA or 5 29 accounts. So I talked a lot about I Roth IRAs in my last episode. Now I'm pivoting to the 5 29 account in this episode. Now you have your kids on payroll. They're funding it, it's going in their, their payroll's going into your personal account.

You set up these 5 29 accounts. Now let's talk about these, these 5 29 education account. Are are unique. They're not just like a an era or normal investment account. You have to select a state administered 5 29 account. Now every state has their own 5 29 platform. I love Utah because Utah uses Vanguard and Vanguard is low cost and I think they have great index funds which are perfect for a 5 29 account.

Utah's uh, program is called my 5 29. If you're in a state that allows a state income tax deduction. For funding a 5 29 account, I would probably go with your own state's plan and you can just look up, just Google your state. Let's say that's Pennsylvania. Pennsylvania 5 29 account plan. How do I get one set up?

And it'll probably be the first link right there. Uh, or you use the Utah plan. Now, you don't need to live in Utah, nor do you, does your child need to go to a school in Utah in order to get the full 100% benefits of the lower cost Vanguard Options provided by the my, my 5 29 Vanguard Utah plan? Totally fine.

My, my son is gonna UCSB here in California, that's Santa Barbara, and he's using a Utah 5 29 account, and there's no issue with that whatsoever. What are some of these benefits of the 5 29? Number one is if you use it for college, they grow tax free. Investment grows, tax deferred, and withdrawals for qualified education expenses are tax free.

For those of you watching on YouTube, you can see it on my screen. State tax benefits. Many states offer state income tax deductions or credits for contributions. Like I said, if your state allows it, you can look it up, Google it. Can I get a state income tax deduction for funding a 5 29 in my state? It will tell you some states have it, most states don't.

In which case, it doesn't matter which state plan you use. High contribution limits, it's, I won't say it's unlimited, but you can fund a massive amount in these 5 29 accounts. Control stays with the account owner. Now I want to talk about this one. You could set up a 5 29 in the name of your kids. Don't do it.

It doesn't help them if they apply for financial aid later, it's less damaging to have a 5 29 balance when a kid is applying for financial aid. If that 5 29 is held or owned by the parents, that's the first benefit. The second benefit is that if your child doesn't need it, doesn't use it, you can then transfer.

If their 5 29 money to their siblings 5 29 account or cousin's 5 29 account, or even hold it for their kids down the road. So there's a lot more flexibility in transferring that 5 29 money to other college attendees in your family if the, the, the primary 5 29 child does not end up using it. And that flexibility, that control is a very valuable aspect of the 5 29 account.

Flexibility a beneficiary. So again, that's just what I spoke about. And then five 20 nines they can cover, uh, more than just college. They can cover K through 12 actually as well if you're interested. Now I prefer not to do that 'cause one of the benefits is growth. And growth only comes in time. But five 20 nines can also be used for trade schools or apprenticeship programs as well.

Also, you can use up to $10,000 of a 5 29 account to pay down student loans. For your child and then they are financially, uh, financial aid friendly. They're generally treated more favorably than a normal custodial investment account for your child as well. So a lot of benefits there. With the 5 29 accounts.

A good strategy might be you take the roughly $14,000 per child deposited for the year. After their FICA tax, so again, their gross W2 is 15,750. They pay a little bit in FICA tax. Let's say they're left with about 14,000 left. You take 7,000 this year, 2025, and you fund the Roth IR up. You can fund that after the year is o over all the way up to, I think it's April, April 1st or April 15th.

You, you can fund it after the year is over. That's fine. Or you can fund it in the year up, that's fine too. And then you take the additional 7,000 beyond the Roth fund and you can put it into an education 5 29 account. Or you can just keep it and use it for your normal daily spending too. That's fine as well.

But I really like to take this, this money. Related to your kids' payroll and ear market. For a given financial planning purpose, I feel like it becomes not just one win from tax savings, but two wins from tax savings and building a pool of assets that can be used for very targeted purposes later with the kids.

Alright, here is a few tips for you owners out there. Use a payroll service for this. Obviously this goes without saying, please don't try to run your own payroll. That's a horrible use of time and you're gonna mess up, I promise, and get a bunch of tax letters. That's like 1980 payroll processing right there.

Please don't do paychecks anymore. You're, you're like 15 years outta date. If you're doing handwritten checks, you should be doing direct deposits. And yeah, that does mean typically that you need to create a spread between the end of the pay period and the direct deposit date to give time for tabulating the hours and submitting it to the payroll company and doing the direct deposits.

Please be doing that. I prefer a week from the end of the payroll to the time that the direct deposit lance in the account to give everybody enough, uh, sort of. Cushion to process everything and when there's weekends in between, uh, the end of the pay period and the target direct deposit date. So anyways, use a really modern payroll service.

We here at Practice CFO have what I think is the most modern payroll service through our payroll tech company that we use on the backend called rippling. It's, uh, a, the latest and greatest out of the payroll world, and then pay a fair wage. So again, I would say the standard deduction. I would document what they're doing ideally, and then I would also just consult your CP on this.

Now, FYI, a lot of CPAs are gonna say, oh, this is too aggressive, yada yada. I've been doing this for 17 years, never had a single IS audit on the matter. Um, just as long as you document it. The IRS cannot dictate. Who you hire or don't hire, you can hire your kids. That is perfectly fine. Nor does the country require a child to be 18 in order to be employed, obviously.

So this is all legit, just sort of documented, so you have a trail to point to in the event that you were audited. Audited, and this was question. Conclusion. This is more than just tax saving. It's building wealth and it is lowering your tax bill and can help fund kids' futures. But like I said, you don't have to use it to fund your kids.

You can just put it in your normal personal checking account and use it for your day to day needs. Alright, everybody, a rather short episode today, but this, these two episodes are on the huge value of getting your kids on payroll. You know, a lot of tax planning and a lot of wealth accumulation. It's like stacking quarters.

You're not gonna like get a $50,000 benefits from this one strategy, but it's gonna get you, you know, eight to $12,000 a year. And you add that up every year. Trust me, you do that, you do home office, you do automobile, use depreciation effectively. Maybe do a little tax timing near the end of the year, maximizing that 401k safe harbor profit share.

If you're old enough, you can do a defined benefit plan. There is just a, an array of tax strategies that. Any one of them may not be huge, although the defined benefit and the 401k, those are huge, but any one of them may not be huge. It's in the aggregate that you're able to cut down 30 to 50 or 60% if you have a defined benefit plan.

It could literally be up to like 80% of your taxes are being chopped off, rerouted away from the IRS and back into your personal balance sheet where you are dramatically accelerating financial independence. That is the name of the game here with the Dental Boardroom Podcast, and that is the mission. A practice CFO.

Hope you enjoyed it. Hope you learn a few things Until next time.