Ever wondered how turning family dinners into board meetings can actually put money back into your pocket? It's not just a fantasy; Daniel and Richard reveal precisely how weaving your loved ones into the fabric of your painting business can be a stroke of genius for your finances. As we swap stories of how our own family journeys serendipitously shaped our tax strategies, you're invited into a world where employing your children isn't just about giving them chores—it's about smart tax savings and setting them up for a future of savvy entrepreneurship. From the nitty-gritty of paying appropriate wages to leveraging child tax credits, we're sketching out a master plan that can help you paint a more secure and profitable family business canvas.
Join us as we pull back the curtain on the transformative power of early retirement planning for your pint-sized employees. Tapping into the magic of Roth IRAs and other retirement accounts, we show you how to plant the seeds of wealth that could bloom into a family financial legacy. We're not just talking theory; the episode is packed with practical tools like online savings calculators and the surprising benefits of formalizing board meetings, all while keeping you on the right side of the IRS. So, if transforming your family enterprise into a portrait of prosperity sounds appealing, let's roll up our sleeves and get to work, because this isn't just about running a business—it's about designing a future.
Ever wondered how turning family dinners into board meetings can actually put money back into your pocket? It's not just a fantasy; Daniel and Richard reveal precisely how weaving your loved ones into the fabric of your painting business can be a stroke of genius for your finances. As we swap stories of how our own family journeys serendipitously shaped our tax strategies, you're invited into a world where employing your children isn't just about giving them chores—it's about smart tax savings and setting them up for a future of savvy entrepreneurship. From the nitty-gritty of paying appropriate wages to leveraging child tax credits, we're sketching out a master plan that can help you paint a more secure and profitable family business canvas.
Join us as we pull back the curtain on the transformative power of early retirement planning for your pint-sized employees. Tapping into the magic of Roth IRAs and other retirement accounts, we show you how to plant the seeds of wealth that could bloom into a family financial legacy. We're not just talking theory; the episode is packed with practical tools like online savings calculators and the surprising benefits of formalizing board meetings, all while keeping you on the right side of the IRS. So, if transforming your family enterprise into a portrait of prosperity sounds appealing, let's roll up our sleeves and get to work, because this isn't just about running a business—it's about designing a future.
Welcome to the Profitable Painter Podcast. The mission of this podcast is simple to help you navigate the financial and tax aspects of starting, running and scaling a professional painting business, from the brushes and ladders to the spreadsheets and balance sheets. We've got you covered. But before we dive in, a quick word of caution While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant.
Speaker 2:We strongly recommend you seeking individualized advice before making any significant financial decision. This is Daniel, the founder of Bookkeeping for Painters.
Speaker 3:And this is Richard, tax director. On a beautiful spring day, the sun is shining and I feel like I've got too much light on my face, but I usually feel that way whenever I'm on camera. If you're listening to this, though, you don't have to worry about it, right, fortunately? This, though, you don't have to worry about it, right, fortunately? Um, I have the face for radio, I've been told. But uh, yeah, we got, yeah, go ahead.
Speaker 2:A good topic today, yeah, um I I just so. I we were just talking right before the podcast and I recently found out that I'm having a fourth child.
Speaker 3:Congratulations.
Speaker 2:Thank you, and so I guess this is what kind of unconsciously gave me the idea for this podcast. But the idea for this podcast is involving your family in your painting business for tax savings. And we recently just found out that we're having a fourth kid. And we did the math my wife and I and we conceived basically a couple of days after we moved back from Nicaragua to the back to the United States and because there was some tax savings that we were benefiting from by living in Nicaragua which is a whole separate podcast on that using the foreign earned income exclusion. But bottom line is coming back to US, our tax liabilities are going way up and I think that maybe had an unconscious effect on her a few days later conceiving a fourth child to get that extra tax deduction and credit child to get that extra tax deduction and credit. So today's podcast is all about involving your family in your business to save in taxes.
Speaker 3:Yeah Well, you know there is that bill that was passed by the House. It's currently in the Senate, doesn't seem to really be going anywhere right now, but if it does get passed, the way it's written, it would increase the child tax credit retroactively for 2023. I don't think there's going to be. There hasn't really been much appetite to move it, so I don't think it's going to happen. But if it does, that would certainly help. The more kids you have, the more tax credit you get. So that would certainly help. The more kids you have, the more tax credit you get. But since we can't count on the government, there are some great ideas that we're going to discuss today about how you can involve your them for when they become adults and want to start businesses of their own.
Speaker 2:Yep, and just involving your family in general, we're trying to give you some basic ideas that might work to your benefit. So the first one is tax savings for kids working in your business. So I think a lot of folks are familiar with this one. The idea is relatively simple. The execution is a little bit nuanced so, but we actually had a whole podcast just on this topic. But the idea is to hire your kids into the business to do work that you would pay someone else to do so.
Speaker 2:The kind of the basic idea here is most state laws into the business to do work that you would pay someone else to do so. The basic idea here is most state laws allow for kids to work that are at least 7 years old, and so you could hire your 7-year-old, 8-year-old, etc. To work in your business, have them do tasks like stuffing mailers, hanging door flyers, those types of things for the younger crowd, maybe a little bit more advanced things for your teenagers, managing your social media, whatever the case is, and then you pay them a reasonable wage, which you would pay someone else to do the same work, and those payments to your kids will be tax deductible to the business and then the earnings that your kid has will be deductible up to the standard deduction, so they can basically get tax-free money from you. It'll be earned income to them and it should be mostly tax-free, with the exception of being payroll taxes, and then there's a deduction for the business and you can get a little bit more fancy with this strategy.
Speaker 2:But that's the basic idea. Was there anything I missed on that one?
Speaker 3:Yeah, I really appreciate that you mentioned hiring them to do things that you would pay other people to do and having them do age-appropriate tasks, because when you mentioned that, there's nuance in the execution, I think that is where most people fail to execute this properly. We get really excited about the idea of transferring money tax-free to our children, but this isn't a tax avoidance scheme. This has to be legitimate work and so the way you back that up is you. You know, just like you would with any other employee, you keep logs or records of the hours worked and you pay a reasonable rate. You know A reasonable rate for stuffing envelopes is not $200 an hour.
Speaker 3:So definitely get them involved, definitely pay them, but it needs to be appropriate. And if you've seen, maybe some influencers or some folks on social media say, well, you know, my 10 month old is a social media model for my company and they wear my branded t-shirt and I pay them $10,000 for a photo shoot, that is not going to pass muster under examination. So it's very, it's very creative and I'm sure, I'm sure your kid is absolutely beautiful and you, you probably would pay ten thousand dollars for their photos. But you know, necessary and ordinary business expenses are going to be the key there You're screwing up my whole tax plan for this year.
Speaker 2:I have my kids have matching shirts, bookkeeping for painters, and you're telling me I can't, I can't just write that off and pay them ten thousand dollars a piece to wear those shirts um, you can do whatever you want.
Speaker 3:I'm just saying that, uh, it probably wouldn't pass an audit or an examination. I mean, I don't know, the irs is gonna look at your kid and be like, okay, well, your kids are absolutely adorable and deserve an exception to the rule. No, no, Reasonable work appropriate for their age is definitely the key there. So you know, this does kind of bring us up against certain limitations, because you know what is a reasonable hourly wage for these admin tasks $15 to maybe $25 an hour, depending on their age and the complexity. Then how many hours are they actually working? It might not be easy to get up to the full $14,000 standard deduction, so we might be tempted to kind of juice it a little bit. And I'm just advising, you know, be careful with that. We need to be able to show that this is legitimate work.
Speaker 3:You also mentioned payroll taxes, and you know that's. You know your social security and your Medicare tax. Now there is an exception for children who work for their parents in what's known as a sole proprietorship. So if mom and dad are the only owners of the business and the business is not taxed like a corporation, then there is an exemption for the kids when it comes to payroll tax and they can actually pay them wages and not have to pay Social Security or Medicare. However, if your company is set up like an S corporation or taxed as an S corporation, then we run into the problem that corporations don't have children, or at least they don't have your children. So in that case you would have to pay that payroll tax or FICA on their wages.
Speaker 3:Now some folks have been able to kind of work around this by establishing a family service company, and what that is is a legitimate business that does admin and other type of service-oriented roles for companies.
Speaker 3:So your family service company could provide cleaning services, it could provide office work, it could provide social media services, whatever legitimate services it provides and then it could contract with your S corporation and other S corporations or other businesses. And then, because that family service company is a sole proprietorship owned only by mom and dad, then the kids wouldn't be subject to that FICA on their wages. But just a word of caution again we're not setting up tax avoidance schemes. Those aren't legal. So our family service company should have at least some for-profit motive. I would like to show at least a little bit of profit each year from that family services company and that profit would be subject to self-employment tax. So be careful there. And we also want to make sure that you know we're at least open to contracting with other companies besides just the S-corp that mom and dad might be shareholders in. So legitimate business, legitimate work, keep everything on the up and up and it should be fine.
Speaker 2:Yeah, and then there's another cool thing since your kids get getting involved so early with your business, they can start using the power of compound interest to their advantage, because they have so much time left in their lives, and this is where they could start a Roth IRA, start putting that earned income into a Roth IRA and then, after five years, they can start taking out the principal. Well, one, the interest is going to grow tax-free, and then, two, after five years, you can withdraw the principal and put that towards, maybe college or going to trade school, whatever the case is, and so this is an excellent retirement vehicle for that tax-free earned income that they're going to be making in your business. Putting that tax-free earned income into a Roth IRA and then it's going to grow tax-free and then you can use it. They could use it for college or trade school or wherever the case is.
Speaker 3:Yeah, I love the opportunities that opens up when your kids have earned income Because, like you said, you're not paying taxes on that earned income and so normally with a Roth it gets taxed on the way in and it doesn't get taxed on the way out. And here you're kind of double dipping, right You're not paying taxes when it goes in and you're not paying taxes when it comes out. And, like you mentioned, you can use that almost like a savings account if necessary, to kind of supplement other tax-advantaged savings accounts like Coverdales and 529s and things like that, yeah, and it's absolutely unheard of to get tax-free on both in and out.
Speaker 2:So this is like a rare opportunity. Got to really stomp the floor on this one. And a cool anecdote, peter Thiel. He used a Roth IRA to purchase Facebook back in the day, like back when it was first starting up, and now it's worth like billions of dollars because it all grew tax-free. He had paid no taxes on all that growth. And that's like an amazing uh anecdote on someone using the roth roth ira to its full potential oh yeah, you know they're very powerful.
Speaker 3:um, I will get off on a tangent into a retirement episode, but um, yeah, any the roths, um different accounts that are like Roths, like HSAs, for example super powerful ways to compound interest and build wealth and not have to pay taxes on it. And what's cool, too, is a traditional IRA is subject to things like required minimum distributions. They make you take your money out when you hit 70, 71 years old. Roths are not subject to that. You can pass that money tax-free onto the next generation. So we just mentioned about how a Roth can be passed on to future generations tax-free. Another way to kind of transfer wealth to your future generations would be equity in your company, but timing it so that you don't pay taxes on that.
Speaker 3:Transfer. Grown, this amazing company that's worth tens of millions of dollars and now you want to transfer that onto your heirs at some point. Well, when that happens, the IRS is going to look at the fair market value of that company and assess gift taxes on it. Now we are able to transfer a decent amount of gifts to our kids and others, but there is a certain limit. Right now, the lifetime limit on that is around $14 million. I do believe that's going to be coming down a little bit. They kind of pumped it up recently temporarily, but if you structure this in a way where you give the equity early in life, you would be well underneath that limit and you may not even need to file a gift tax return if you keep it low enough and you do this early enough. It low enough and you and you do this early enough.
Speaker 2:It 14 million might seem like a lot, but this is over the entire, your entire life. You can only give away 14 million without getting taxes. So if you, if you hit all your goals and you're just killing your painting business and you you know plenty of painting businesses can hit 10 million million in revenue and therefore the value of their company is worth over $10 million, and then you have that cash flow coming in. Maybe you're gifting to charities, to your family, whatever it is, so that $14 million can be given away over the course of a lifetime easily if you become wealthy and hit your goals. So this could definitely apply to you, especially for those that are really determined, and you might be surprised on how quickly you can burn up all those gifts, that gift tax limit and, like you're saying, richard, giving equity early.
Speaker 2:You can avoid all that hassle Basically if you give some equity early. If you know, hey, I'm just kind of early, I'm in my 30s, my business is still. I'm just doing a million or two or maybe less, but I still want to grow. I'm going to be in business for the next 20 years, so it's going to grow even more than that in the coming timeframe so I can give a portion of the business to my kids now and maybe avoid having to even report it if it's under the yearly threshold and then definitely not have to pay any gift taxes on it. And so when that business triples, quadruples, 10x over the course of many years, you avoid all that gift tax. So this can be a really powerful way to transfer wealth from yourself to your kids or even your grandkids.
Speaker 3:Yeah, you mentioned, if you do it in small enough chunks you might not even have to report it. So they have what they call a gift tax exclusion, which is an amount each year you're able to gift and you don't even have to let the IRS know. So it does not count against your $14 million lifetime limit For 2024, that amount is $18,000. So you can give away $18,000, and you can do that each and every year. It is adjusted for inflation, so it does go up over the years and you don't have to worry about reporting it. It doesn't count against your limit and that is $18,000 per spouse. So if you and your spouse are both shareholders in the company, you could both conceivably gift 18,000 each, or a total of 36,000, you know to a child and 36,000 to another child, and be able to give them that equity early and then you watch it grow down the line. So I think, Daniel, you were saying that Sam Walton made really good use of this tactic.
Speaker 2:Yes, sam Walton, the founder of Walmart. He did this early with his family. He basically gifted them equity in Walmart before it went public, when it wasn't worth nearly as much. It was definitely not a billion-dollar company, he had just started it. He involved his family early, gave them equity and then, as the company grew and then as it went public, worth billions, he didn't have to worry about getting hit with that gift tax to pass on that wealth, because they already had all the wealth that he had, which was basically all in his business, because they already had all the wealth that he had, which was basically all in his business.
Speaker 3:So he made a great, really key strategic move early on by transferring wealth early. Yeah, can you imagine getting equity in Walmart 40, 50 years ago and what it would be worth today? It's just kind of mind-boggling and the fact that they won't have to pay taxes on that transfer of wealth is pretty great yeah.
Speaker 2:They're worth multiple millions and they never had to pay a cent in taxes for that. I mean because you don't have to pay taxes on assets that you are not. Unless you sell the asset, you don't have to pay a cent in taxes for that. I mean because you don't have to pay taxes on assets that you are not, unless you sell the asset. You don't have to pay taxes on an asset that's just growing in value.
Speaker 3:Yeah, I appreciate you clarifying that, because I thought about that. Like, well, they don't have to pay taxes on it unless they sell it, and then that's a different story. There's ways around that too. I mean there's. But you know, live, borrow and die is an interesting strategy there, but that's for a different episode. All right, how about? You know?
Speaker 3:We kind of touched on this a little bit earlier but how about retirement plan participation? Them this a little bit earlier. But how about retirement plan participation? So your kids are working in the business Now they have earned income, now they can set up things such as Roth IRAs.
Speaker 3:What if they go over the $14,000 or so standard deduction and now they have taxable income? Perhaps a company 401k or a traditional individual IRA could help, right, because that's tax deductible. So if they hit $15,000, $16,000, maybe a $2,000 contribution to an IRA could bring that back underneath the threshold there. So that, yeah, that's a possibility to get even more. And I think the most powerful part of this is just the amazing power of compound interest and how, when it comes to that, time is almost more valuable. I shouldn't say it is. Time is more valuable than money. It's better to put in a smaller amount of money over a longer amount of time than it is to try and catch up and pump extra money into an investment account for a shorter amount of time. So even just a few thousand dollars invested when the children are young, that's going to compound for 50 or 60 years will become a tremendous amount of money at retirement age.
Speaker 2:Yeah, and the retirement plan in the business, your kids could participate. Obviously, if your spouse is in the business, they could participate in this. It's just another opportunity to stash away money and shield it from taxes. If it's a tax-advantaged retirement account and there's several different flavors of retirement accounts out there that might make sense for your different situation, like a SEP IRA versus a simple IRA versus a 401k and each have their strengths and weaknesses, and we actually had a full podcast on those different accounts and what might make sense for your specific situation.
Speaker 3:Yeah, yeah. Or even just a simple individual IRA that's held outside of the company, I believe yeah, for 2024,. You can put up to $7,000 a year into something like that. So if you don't want to set up a formal account for the company, you can have an individual account and get $7,000 a year in there. Yeah, so lots of opportunity there, teaching the children about the power of compound interest. And I tell you, there's a million compound interest calculators on the internet. I'd say, go find your favorite Dave Ramsey has them, nerdwallet has them and just play with a few numbers. Just a couple thousand dollars, $5,000 at 10% annual rate of return, which is about what the stock market delivers in the long run. And look at the difference between 30 years and 40 years, or even 45 years. It's absolutely amazing how much that can grow. So what? Yeah, so now, now, go ahead.
Speaker 2:I was going to say so. The next piece is establishing a board of advisors for your business and involving your family, and we actually had a whole separate podcast on this as well. But to get kind of the big picture here, the idea here is you need advice to grow your business.
Speaker 2:In Michael Jordan's biography, one of the main themes that Michael Jordan was always saying was that he needed the input of his coaches and he always took the advice that he got and implemented it to the best of his ability. So he wasn't we think of Michael Jordan. He was like the pinnacle of success and drive, but he was also just a sponge and he was absorbing things from his coaches and implementing as much as he could, and that was something that he always said. He was always absorbing things from his coaches and trying to implement and get better and better and better. So we need to do that in our businesses too, and we get that from our friends and family a lot of times from mentors. We get that from our friends and family a lot of times from mentors.
Speaker 2:So involving those people in in your business in an official way through a board of directors, you can get the best of both worlds, where you're getting advice and counsel from folks and you're also getting a kind of a work life harmony, as Jeff Bezos would put it, uh, with your family and your business, where you're interacting with your family more. Uh, as we're all busy entrepreneurs, you know the this is an opportunity to involve your family in something that's work related, but it will give you know, uh, bring, bring you together, and also there are some tax savings that you can acquire from doing this, which I'll pass to Richard to cover that piece.
Speaker 3:Yeah, I was just going to mention. You know we all get advice but it's usually very informal. We're talking to our spouse over the dinner table or we're calling a friend on the phone, one of the other, you know. The advantage of formalizing it, like Daniel you're talking about, is there's the tax savings part of it, but there's also the strengthening of your corporate veil and your business structure. Of your corporate veil and your business structure. If you are operating a company that is taxed as an S-corp, you have a corporation and corporations have board meetings and corporations have corporate books that track this sort of thing. And having those board meetings and recording the minutes, even if it is just fairly simple, it's going to go a very long way to strengthening your corporate veil and giving you that protection so that if somebody comes at your corporation with a lawsuit because they ran into one of your trucks or your ladder fell on their petunias, they you know You're limiting your liability so that they can't come after you personally. And having those board meetings helps strengthen that corporate veil. It also shows the kids that this is serious, we take our work seriously, they have a role in the business and it helps get them thinking in a business mindset when they're young.
Speaker 3:So where are you going to have these corporate, you know board meetings? Well, you know you, you it's up to you as the business owner, but oftentimes a private room at a restaurant or maybe a conference room at a hotel would be the ideal place to hold a meeting, you know, with five, seven or nine board members and there could be some legitimate, you know expenses involved with that. There might be travel expenses involved, there's probably some food and beverage expenses involved. As long as these things are associated with the board meeting, they are 100% tax deductible. So if you're going to have a board meeting at a private room in a restaurant and you're going to talk business for 30, 45, 60 minutes, whatever your requirements are, and then have a meal, that is a business meal and everyone's drinks and food and you know dinner is a write-off.
Speaker 3:So it kind of serves two purposes. One, the board meeting. That's the primary purpose. It is a business meeting. But two, it gives you a chance to, you know, connect with people you're close to close to, whether they're family or you're building those business relationships with other business owners who are on your board. It can be a really enjoyable time.
Speaker 2:Yeah. So just to recap, I think we hit many different topics here. So the first thing explore the idea of hiring your kids in your business. There could be some tax savings available to you Also getting your family involved, your kids involved, in building that work ethic and giving them opportunities to save money on taxes by saving early, putting their savings in a Roth IRA and setting them up for trade school or college.
Speaker 2:Then, number two consider transferring equity early, either to your spouse or to your kids or grandkids when the business is smaller.
Speaker 2:Because if you're going to be in your business for the long term, for decades, and you have a growth mindset, you hopefully will grow your business many times over. So transfer the equity early so you can avoid those gift taxes or estate taxes. Definitely explore retirement plans for either on the personal side or in the business to take advantage of compound interest and set your family up for success and have them participate in those company retirement plans. And then, number four establish a board of advisors for your company and get your family involved to get them involved in the business for your company and get your family involved to get them involved in the business, so you're getting that advice and also have that formalized and build up that corporate veil in your corporation or your LLC, and then also realize the tax savings of basically being able to write off official functions that involve your board of directors, who would also be your friends and family. So was there anything else that I missed on the wrap up there, richard?
Speaker 3:I think you did a great job recapping those points.
Speaker 3:I just love the idea of our businesses are our babies and be able to involve our family in that and have them work with us towards something that is so meaningful and so important to us. If it's done right, I think can be really powerful. And I love the idea of being able to set up the next generation with these skills and abilities when they're young, up the next generation with these skills and abilities when they're young, helping them understand how business works, helping them know what a work ethic is and also helping them find that work-life harmony so that when they are adults and they are out in the world making money themselves, they are going to be well ahead of the game because they're going to learn a lot of things at a young age that a lot of us had to learn the hard way, and so they're going to have that step ahead. So I think it's a wonderful thing to do. Yes, there are definitely financial and tax benefits, but I think there's a lot of just intangible benefits to having your family involved in your business too.
Speaker 2:Absolutely Cool. Well, we would love to hear your thoughts. If you go to Grow your Painting Business in Facebook and send an invite, we'll accept you Definitely join the conversation. Let us know what your thoughts are on any of the tech strategies or ideas that we posed in this podcast episode, or if you have any ideas for future episodes. Definitely let us know. And with that, we'll see you next week. Yeah, thanks for listening.