The Secret to Turning Payroll Into a Tax-Free Gift for Your Children

Introduction

Most dentists work tirelessly to provide for their families, but many overlook a powerful tax strategy that can both reduce their IRS bill and help their children build long-term wealth. It may sound unusual, but putting your kids on your practice’s payroll can be one of the smartest financial decisions you make.

This strategy isn’t about cutting corners or bending rules—it’s about using the tax code the way it was designed. By shifting a portion of your taxable income into your children’s 0% tax bracket, you can save thousands in taxes each year while giving your kids an incredible financial head start.

Here’s how it works and why dentists should seriously consider it.

How Kids on Payroll Works

When you pay your children a reasonable wage for legitimate work, you’re essentially transferring income from your higher tax bracket to their much lower—or even zero—tax bracket.

• Eligible ages: Children can typically be paid starting around age 6 or 7, continuing through high school and even college.
  
• The 2025 standard deduction: $15,750 per child.
  
• The savings: If your child earns that amount or less, they pay zero federal income tax. Meanwhile, you deduct their wages from your taxable income, saving you roughly $3,000–$4,000 per child, per year.
  

To put it in perspective: a dentist with three children who follows this strategy for 15 years could save more than $200,000 in taxes—money that would have otherwise gone straight to the IRS.

Why This Strategy Is Low Risk

Dentists sometimes hesitate, worrying the IRS may view this as aggressive. The reality is that this is a well-established, legitimate strategy when handled properly.

Here’s how to keep it compliant:

• Document their role: Maintain a simple job description—whether that’s filing, cleaning, helping with social media, or even modeling in marketing photos.
  
• Keep evidence: Pictures of your kids working around the office or occasional timesheets go a long way in showing legitimacy.
  
• Pay through payroll services: Use modern systems like Rippling to issue direct deposits instead of handwritten checks. This creates a clear paper trail.
  
• Pay a fair wage: The IRS cannot dictate who you hire, but the wage should reasonably reflect the type of work performed.
  

Wes Read, CPA and host of The Dental Boardroom Podcast, has been advising clients on this strategy for more than 17 years without a single IRS audit related to it.

Turning Payroll Into Wealth

The magic of this strategy isn’t just in the immediate tax savings. It’s what you do with the money that truly creates a tax-free gift for your children.

Here are two of the best ways dentists can maximize the impact:

1. Fund a Custodial Roth IRA

• Your child’s wages make them eligible to contribute up to $7,000 (2025 limit) into a Roth IRA.
  
• Parents act as custodians of the account until the child reaches adulthood.
  
• Contributions grow tax-free, and withdrawals in retirement are tax-free.
  
• This allows your children to build wealth from an early age, compounding for decades.
  

2. Contribute to a 529 College Savings Plan

• Payroll dollars can also be directed toward a 529 plan.
  
• Earnings grow tax-deferred, and withdrawals for education are tax-free.
  
• These accounts can be transferred between siblings or even future grandchildren, giving families long-term flexibility.
  

By combining payroll with tax-advantaged accounts, you create a double benefit: lowering your own tax bill while helping your kids prepare for college, retirement, or both.

Why It Matters for Dentists

Dentists often feel squeezed by high taxes and overhead. The beauty of this strategy is that it takes dollars the IRS would normally claim and reroutes them into your family’s financial future.

Think of it as stacking small wins:

• $3,000–$4,000 saved per child each year.
  
• Compounded Roth IRA growth over decades.
  
• College costs covered by 529 funds.
  

Individually, these wins may seem modest, but over time they can add up to hundreds of thousands of dollars in family wealth.

Final Thoughts

Putting your kids on payroll is more than just a tax strategy. It’s an opportunity to teach them the value of work, help them build savings early, and reduce your tax burden in a perfectly legitimate way. With proper documentation and the right payroll setup, this can be one of the most rewarding financial moves you make as both a parent and a dentist.
Want to hear exactly how this works and how other dentists are using it successfully?

Listen to Episode 129 of The Dental Boardroom Podcast: Money Well Spent (Part 2)