May 17, 2024 • 32 mins
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.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters.
Speaker 3 (00:45):
And this is Richard, tax director.
On a beautiful spring day, thesun is shining and I feel like
I've got too much light on myface, 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 toworry about it, right,
(01:09):
fortunately?
Um, I have the face for radio,I've been told.
But uh, yeah, we got, yeah, goahead.
Speaker 2 (01:12):
A good topic today, yeah, um I I just so.
I we were just talking rightbefore the podcast and I
recently found out that I'mhaving a fourth child.
Speaker 3 (01:23):
Congratulations.
Speaker 2 (01:24):
Thank you, and so I guess this is what kind of
unconsciously gave me the ideafor this podcast.
But the idea for this podcastis involving your family in your
painting business for taxsavings.
And we recently just found outthat we're having a fourth kid.
And we did the math my wife andI and we conceived basically a
(01:50):
couple of days after we movedback from Nicaragua to the back
to the United States and becausethere was some tax savings that
we were benefiting from byliving in Nicaragua which is a
whole separate podcast on thatusing the foreign earned income
exclusion.
But bottom line is coming backto US, our tax liabilities are
(02:11):
going way up and I think thatmaybe had an unconscious effect
on her a few days laterconceiving a fourth child to get
that extra tax deduction andcredit child to get that extra
tax deduction and credit.
So today's podcast is all aboutinvolving your family in your
(02:32):
business to save in taxes.
Speaker 3 (02:32):
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 itdoes get passed, the way it's
written, it would increase thechild tax credit retroactively
for 2023.
I don't think there's going tobe.
(02:53):
There hasn't really been muchappetite to move it, so I don't
think it's going to happen.
But if it does, that wouldcertainly help.
The more kids you have, themore tax credit you get.
So that would certainly help.
The more kids you have, themore tax credit you get.
But since we can't count on thegovernment, there are some
(03:28):
great ideas that we're going todiscuss today about how you can
involve your them for when theybecome adults and want to start
businesses of their own.
Speaker 2 (03:32):
Yep, and just involving your family in general
, we're trying to give you somebasic ideas that might work to
your benefit.
So the first one is tax savingsfor kids working in your
business.
So I think a lot of folks arefamiliar with this one.
The idea is relatively simple.
The execution is a little bitnuanced so, but we actually had
(03:52):
a whole podcast just on thistopic.
But the idea is to hire yourkids into the business to do
work that you would pay someoneelse to do so.
The kind of the basic idea hereis most state laws into the
business to do work that youwould pay someone else to do so.
(04:14):
The basic idea here is moststate laws allow for kids to
work that are at least 7 yearsold, and so you could hire your
7-year-old, 8-year-old, etc.
To work in your business, havethem do tasks like stuffing
mailers, hanging door flyers,those types of things for the
younger crowd, maybe a littlebit more advanced things for
your teenagers, managing yoursocial media, whatever the case
(04:35):
is, and then you pay them areasonable wage, which you would
pay someone else to do the samework, and those payments to
your kids will be tax deductibleto the business and then the
earnings that your kid has willbe deductible up to the standard
(04:56):
deduction, so they canbasically get tax-free money
from you.
It'll be earned income to themand it should be mostly tax-free
, with the exception of beingpayroll taxes, and then there's
a deduction for the business andyou can get a little bit more
fancy with this strategy.
But that's the basic idea.
(05:17):
Was there anything I missed onthat one?
Speaker 3 (05:19):
Yeah, I really appreciate that you mentioned
hiring them to do things thatyou would pay other people to do
and having them doage-appropriate tasks, because
when you mentioned that, there'snuance in the execution, I
think that is where most peoplefail to execute this properly.
We get really excited about theidea of transferring money
(05:43):
tax-free to our children, butthis isn't a tax avoidance
scheme.
This has to be legitimate workand so the way you back that up
is you.
You know, just like you wouldwith any other employee, you
keep logs or records of thehours worked and you pay a
reasonable rate.
(06:03):
You know A reasonable rate forstuffing envelopes is not $200
an hour.
So definitely get them involved,definitely pay them, but it
needs to be appropriate.
And if you've seen, maybe someinfluencers or some folks on
social media say, well, you know, my 10 month old is a social
(06:27):
media model for my company andthey wear my branded t-shirt and
I pay them $10,000 for a photoshoot, that is not going to pass
muster under examination.
So it's very, it's verycreative and I'm sure, I'm sure
your kid is absolutely beautifuland you, you probably would pay
ten thousand dollars for theirphotos.
(06:47):
But you know, necessary andordinary business expenses are
going to be the key there You'rescrewing up my whole tax plan
for this year.
Speaker 2 (06:58):
I have my kids have matching shirts, bookkeeping for
painters, and you're telling meI can't, I can't just write
that off and pay them tenthousand dollars a piece to wear
those shirts um, you can dowhatever you want.
Speaker 3 (07:12):
I'm just saying that, uh, it probably wouldn't pass
an audit or an examination.
I mean, I don't know, the irsis gonna look at your kid and be
like, okay, well, your kids areabsolutely adorable and deserve
an exception to the rule.
No, no, Reasonable workappropriate for their age is
(07:33):
definitely the key there.
So you know, this does kind ofbring us up against certain
limitations, because you knowwhat is a reasonable hourly wage
for these admin tasks $15 tomaybe $25 an hour, depending on
their age and the complexity.
Then how many hours are theyactually working?
It might not be easy to get upto the full $14,000 standard
(08:00):
deduction, so we might betempted 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 thatthis is legitimate work.
You also mentioned payroll taxes, and you know that's.
You know your social securityand your Medicare tax.
(08:20):
Now there is an exception forchildren who work for their
parents in what's known as asole proprietorship.
So if mom and dad are the onlyowners of the business and the
business is not taxed like acorporation, then there is an
exemption for the kids when itcomes to payroll tax and they
(08:43):
can actually pay them wages andnot have to pay Social Security
or Medicare.
However, if your company is setup like an S corporation or
taxed as an S corporation, thenwe 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 haveto pay that payroll tax or FICA
(09:07):
on their wages.
Now some folks have been able tokind of work around this by
establishing a family servicecompany, and what that is is a
legitimate business that doesadmin and other type of
service-oriented roles forcompanies.
(09:31):
So your family service companycould provide cleaning services,
it could provide office work,it could provide social media
services, whatever legitimateservices it provides and then it
could contract with your Scorporation and other S
corporations or other businesses.
(09:53):
And then, because that familyservice company is a sole
proprietorship owned only by momand dad, then the kids wouldn't
be subject to that FICA ontheir wages.
But just a word of cautionagain we're not setting up tax
avoidance schemes.
Those aren't legal.
(10:13):
So our family service companyshould have at least some
for-profit motive.
I would like to show at least alittle bit of profit each year
from that family servicescompany and that profit would be
subject to self-employment tax.
So be careful there.
And we also want to make surethat you know we're at least
(10:38):
open to contracting with othercompanies besides just the
S-corp that mom and dad might beshareholders in.
So legitimate business,legitimate work, keep everything
on the up and up and it shouldbe fine.
Speaker 2 (10:54):
Yeah, and then there's another cool thing since
your kids get getting involvedso early with your business,
they can start using the powerof compound interest to their
advantage, because they have somuch time left in their lives,
and this is where they couldstart a Roth IRA, start putting
that earned income into a RothIRA and then, after five years,
(11:18):
they can start taking out theprincipal.
Well, one, the interest isgoing to grow tax-free, and then
, two, after five years, you canwithdraw the principal and put
that towards, maybe college orgoing to trade school, whatever
the case is, and so this is anexcellent retirement vehicle for
that tax-free earned incomethat they're going to be making
(11:40):
in your business.
Putting that tax-free earnedincome into a Roth IRA and then
it's going to grow tax-free andthen you can use it.
They could use it for collegeor trade school or wherever the
case is.
Speaker 3 (11:51):
Yeah, I love the opportunities that opens up when
your kids have earned incomeBecause, like you said, you're
not paying taxes on that earnedincome and so normally with a
Roth it gets taxed on the way inand it doesn't get taxed on the
way out.
And here you're kind of doubledipping, right You're not paying
taxes when it goes in andyou're not paying taxes when it
(12:12):
comes out.
And, like you mentioned, youcan use that almost like a
savings account if necessary, tokind of supplement other
tax-advantaged savings accountslike Coverdales and 529s and
things like that, yeah, and it'sabsolutely unheard of to get
tax-free on both in and out.
Speaker 2 (12:34):
So this is like a rare opportunity.
Got to really stomp the flooron this one.
And a cool anecdote, peterThiel.
He used a Roth IRA to purchaseFacebook back in the day, like
back when it was first startingup, and now it's worth like
billions of dollars because itall grew tax-free.
(12:54):
He had paid no taxes on allthat growth.
And that's like an amazing uhanecdote on someone using the
roth roth ira to its fullpotential oh yeah, you know
they're very powerful.
Speaker 3 (13:06):
um, I will get off on a tangent into a retirement
episode, but um, yeah, any theroths, um different accounts
that are like Roths, like HSAs,for example super powerful ways
to compound interest and buildwealth and not have to pay taxes
on it.
And what's cool, too, is atraditional IRA is subject to
(13:30):
things like required minimumdistributions.
They make you take your moneyout when you hit 70, 71 years
old.
Roths are not subject to that.
You can pass that moneytax-free onto the next
generation.
So we just mentioned about howa Roth can be passed on to
future generations tax-free.
(13:50):
Another way to kind of transferwealth to your future
generations would be equity inyour company, but timing it so
(14:11):
that you don't pay taxes on that.
Transfer.
Grown, this amazing companythat's worth tens of millions of
dollars and now you want totransfer that onto your heirs at
some point.
Well, when that happens, theIRS is going to look at the fair
market value of that companyand assess gift taxes on it.
(14:32):
Now we are able to transfer adecent amount of gifts to our
kids and others, but there is acertain limit.
Right now, the lifetime limiton that is around $14 million.
I do believe that's going to becoming down a little bit.
They kind of pumped it uprecently temporarily, but if you
(14:56):
structure this in a way whereyou give the equity early in
life, you would be wellunderneath that limit and you
may not even need to file a gifttax return if you keep it low
enough and you do this earlyenough.
It low enough and you and youdo this early enough.
Speaker 2 (15:14):
It 14 million might seem like a lot, but this is
over the entire, your entirelife.
You can only give away 14million without getting taxes.
So if you, if you hit all yourgoals and you're just killing
your painting business and youyou know plenty of painting
businesses can hit 10 millionmillion in revenue and therefore
(15:36):
the value of their company isworth over $10 million, and then
you have that cash flow comingin.
Maybe you're gifting tocharities, to your family,
whatever it is, so that $14million can be given away over
the course of a lifetime easilyif you become wealthy and hit
your goals.
So this could definitely applyto you, especially for those
(15:58):
that are really determined, andyou might be surprised on how
quickly you can burn up allthose gifts, that gift tax limit
and, like you're saying,richard, giving equity early.
You can avoid all that hassleBasically if you give some
equity early.
If you know, hey, I'm just kindof early, I'm in my 30s, my
(16:20):
business is still.
I'm just doing a million or twoor maybe less, but I still want
to grow.
I'm going to be in business forthe next 20 years, so it's
going to grow even more thanthat in the coming timeframe so
I can give a portion of thebusiness to my kids now and
maybe avoid having to evenreport it if it's under the
(16:42):
yearly threshold and thendefinitely not have to pay any
gift taxes on it.
And so when that businesstriples, quadruples, 10x over
the course of many years, youavoid all that gift tax.
So this can be a reallypowerful way to transfer wealth
from yourself to your kids oreven your grandkids.
Speaker 3 (17:05):
Yeah, you mentioned, if you do it in small enough
chunks you might not even haveto report it.
So they have what they call agift tax exclusion, which is an
amount each year you're able togift and you don't even have to
let the IRS know.
So it does not count againstyour $14 million lifetime limit
For 2024, that amount is $18,000.
(17:28):
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 worryabout reporting it.
It doesn't count against yourlimit and that is $18,000 per
spouse.
So if you and your spouse areboth shareholders in the company
(17:50):
, you could both conceivablygift 18,000 each, or a total of
36,000, you know to a child and36,000 to another child, and be
able to give them that equityearly and then you watch it grow
down the line.
So I think, Daniel, you weresaying that Sam Walton made
(18:16):
really good use of this tactic.
Speaker 2 (18:19):
Yes, sam Walton, the founder of Walmart.
He did this early with hisfamily.
He basically gifted them equityin Walmart before it went
public, when it wasn't worthnearly as much.
It was definitely not abillion-dollar company, he had
just started it.
He involved his family early,gave them equity and then, as
(18:40):
the company grew and then as itwent public, worth billions, he
didn't have to worry aboutgetting hit with that gift tax
to pass on that wealth, becausethey already had all the wealth
that he had, which was basicallyall in his business, because
they already had all the wealththat he had, which was basically
all in his business.
Speaker 3 (19:04):
So he made a great, really key strategic move early
on by transferring wealth early.
Yeah, can you imagine gettingequity in Walmart 40, 50 years
ago and what it would be worthtoday?
It's just kind of mind-bogglingand the fact that they won't
have to pay taxes on thattransfer of wealth is pretty
(19:26):
great yeah.
Speaker 2 (19:27):
They're worth multiple millions and they never
had to pay a cent in taxes forthat.
I mean because you don't haveto pay taxes on assets that you
are not.
Unless you sell the asset, youdon't have to pay a cent in
taxes for that.
I mean because you don't haveto pay taxes on assets that you
are not, unless you sell theasset.
You don't have to pay taxes onan asset that's just growing in
value.
Speaker 3 (19:43):
Yeah, I appreciate you clarifying that, because I
thought about that.
Like, well, they don't have topay taxes on it unless they sell
it, and then that's a differentstory.
There's ways around that too.
I mean there's.
But you know, live, borrow anddie is an interesting strategy
(20:03):
there, but that's for adifferent episode.
All right, how about?
You know?
We kind of touched on this alittle bit earlier but how about
retirement plan participation?
Them this a little bit earlier.
But how about retirement planparticipation?
So your kids are working in thebusiness Now they have earned
income, now they can set upthings such as Roth IRAs.
(20:24):
What if they go over the $14,000or so standard deduction and
now they have taxable income?
Perhaps a company 401k or atraditional individual IRA could
help, right, because that's taxdeductible.
So if they hit $15,000, $16,000, maybe a $2,000 contribution to
(20:47):
an IRA could bring that backunderneath the threshold there.
So that, yeah, that's apossibility to get even more.
And I think the most powerfulpart of this is just the amazing
power of compound interest andhow, when it comes to that, time
(21:08):
is almost more valuable.
I shouldn't say it is.
Time is more valuable thanmoney.
It's better to put in a smalleramount of money over a longer
amount of time than it is to tryand catch up and pump extra
money into an investment accountfor a shorter amount of time.
So even just a few thousanddollars invested when the
(21:29):
children are young, that's goingto compound for 50 or 60 years
will become a tremendous amountof money at retirement age.
Speaker 2 (21:40):
Yeah, and the retirement plan in the business,
your kids could participate.
Obviously, if your spouse is inthe business, they could
participate in this.
It's just another opportunityto stash away money and shield
it from taxes.
If it's a tax-advantagedretirement account and there's
several different flavors ofretirement accounts out there
(22:00):
that might make sense for yourdifferent situation, like a SEP
IRA versus a simple IRA versus a401k and each have their
strengths and weaknesses, and weactually had a full podcast on
those different accounts andwhat might make sense for your
specific situation.
Speaker 3 (22:21):
Yeah, yeah.
Or even just a simpleindividual IRA that's held
outside of the company, Ibelieve yeah, for 2024,.
You can put up to $7,000 a yearinto something like that.
So if you don't want to set upa formal account for the company
, you can have an individualaccount and get $7,000 a year in
(22:45):
there.
Yeah, so lots of opportunitythere, teaching the children
about the power of compoundinterest.
And I tell you, there's amillion compound interest
calculators on the internet.
I'd say, go find your favoriteDave Ramsey has them, nerdwallet
has them and just play with afew numbers.
(23:07):
Just a couple thousand dollars,$5,000 at 10% annual rate of
return, which is about what thestock market delivers in the
long run.
And look at the differencebetween 30 years and 40 years,
or even 45 years.
It's absolutely amazing howmuch that can grow.
(23:29):
So what?
Yeah, so now, now, go ahead.
Speaker 2 (23:33):
I was going to say so .
The next piece is establishinga board of advisors for your
business and involving yourfamily, and we actually had a
whole separate podcast on thisas well.
But to get kind of the bigpicture here, the idea here is
you need advice to grow yourbusiness.
(23:59):
In Michael Jordan's biography,one of the main themes that
Michael Jordan was always sayingwas that he needed the input of
his coaches and he always tookthe advice that he got and
implemented it to the best ofhis ability.
So he wasn't we think ofMichael Jordan.
He was like the pinnacle ofsuccess and drive, but he was
(24:23):
also just a sponge and he wasabsorbing things from his
coaches and implementing as muchas he could, and that was
something that he always said.
He was always absorbing thingsfrom his coaches and trying to
implement and get better andbetter and better.
So we need to do that in ourbusinesses too, and we get that
from our friends and family alot of times from mentors.
We get that from our friendsand family a lot of times from
(24:44):
mentors.
So involving those people in inyour business in an official way
through a board of directors,you can get the best of both
worlds, where you're gettingadvice and counsel from folks
and you're also getting a kindof a work life harmony, as Jeff
(25:04):
Bezos would put it, uh, withyour family and your business,
where you're interacting withyour family more.
Uh, as we're all busyentrepreneurs, you know the this
is an opportunity to involveyour family in something that's
work related, but it will giveyou know, uh, bring, bring you
together, and also there aresome tax savings that you can
(25:28):
acquire from doing this, whichI'll pass to Richard to cover
that piece.
Speaker 3 (25:35):
Yeah, I was just going to mention.
You know we all get advice butit's usually very informal.
We're talking to our spouseover 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 taxsavings part of it, but there's
(25:58):
also the strengthening of yourcorporate veil and your business
structure.
Of your corporate veil and yourbusiness structure.
If you are operating a companythat is taxed as an S-corp, you
have a corporation andcorporations have board meetings
and corporations have corporatebooks that track this sort of
thing.
And having those board meetingsand recording the minutes, even
(26:22):
if it is just fairly simple,it's going to go a very long way
to strengthening your corporateveil and giving you that
protection so that if somebodycomes at your corporation with a
lawsuit because they ran intoone of your trucks or your
ladder fell on their petunias,they you know You're limiting
(26:45):
your liability so that theycan't come after you personally.
And having those board meetingshelps strengthen that corporate
veil.
It also shows the kids thatthis is serious, we take our
work seriously, they have a rolein the business and it helps
get them thinking in a businessmindset when they're young.
(27:08):
So where are you going to havethese corporate, you know board
meetings?
Well, you know you, you it's upto you as the business owner,
but oftentimes a private room ata restaurant or maybe a
conference room at a hotel wouldbe the ideal place to hold a
meeting, you know, with five,seven or nine board members and
(27:31):
there could be some legitimate,you know expenses involved with
that.
There might be travel expensesinvolved, there's probably some
food and beverage expensesinvolved.
As long as these things areassociated with the board
meeting, they are 100% taxdeductible.
So if you're going to have aboard meeting at a private room
(27:54):
in a restaurant and you're goingto talk business for 30, 45, 60
minutes, whatever yourrequirements are, and then have
a meal, that is a business mealand everyone's drinks and food
and you know dinner is awrite-off.
So it kind of serves twopurposes.
(28:15):
One, the board meeting.
That's the primary purpose.
It is a business meeting.
But two, it gives you a chanceto, you know, connect with
people you're close to close to,whether they're family or
you're building those businessrelationships with other
business owners who are on yourboard.
It can be a really enjoyabletime.
Speaker 2 (28:38):
Yeah.
So just to recap, I think wehit many different topics here.
So the first thing explore theidea of hiring your kids in your
business.
There could be some tax savingsavailable to you Also getting
your family involved, your kidsinvolved, in building that work
(28:59):
ethic and giving themopportunities to save money on
taxes by saving early, puttingtheir savings in a Roth IRA and
setting them up for trade schoolor college.
Then, number two considertransferring equity early,
either to your spouse or to yourkids or grandkids when the
business is smaller.
(29:20):
Because if you're going to be inyour business for the long term
, for decades, and you have agrowth mindset, you hopefully
will grow your business manytimes over.
So transfer the equity early soyou can avoid those gift taxes
or estate taxes.
Definitely explore retirementplans for either on the personal
(29:44):
side or in the business to takeadvantage of compound interest
and set your family up forsuccess and have them
participate in those companyretirement plans.
And then, number four establisha board of advisors for your
company and get your familyinvolved to get them involved in
the business for your companyand get your family involved to
(30:07):
get them involved in thebusiness, so you're getting that
advice and also have thatformalized and build up that
corporate veil in yourcorporation or your LLC, and
then also realize the taxsavings of basically being able
to write off official functionsthat involve your board of
directors, who would also beyour friends and family.
(30:28):
So was there anything else thatI missed on the wrap up there,
richard?
Speaker 3 (30:34):
I think you did a great job recapping those points
.
I just love the idea of ourbusinesses are our babies and be
able to involve our family inthat and have them work with us
towards something that is someaningful and so important to
us.
If it's done right, I think canbe really powerful.
(30:57):
And I love the idea of beingable to set up the next
generation with these skills andabilities when they're young,
up the next generation withthese skills and abilities when
they're young, helping themunderstand how business works,
helping them know what a workethic is and also helping them
find that work-life harmony sothat when they are adults and
(31:18):
they are out in the world makingmoney themselves, they are
going to be well ahead of thegame because they're going to
learn a lot of things at a youngage that a lot of us had to
learn the hard way, and sothey're going to have that step
ahead.
So I think it's a wonderfulthing to do.
Yes, there are definitelyfinancial and tax benefits, but
(31:38):
I think there's a lot of justintangible benefits to having
your family involved in yourbusiness too.
Speaker 2 (31:47):
Absolutely Cool.
Well, we would love to hearyour thoughts.
If you go to Grow your PaintingBusiness in Facebook and send
an invite, we'll accept youDefinitely join the conversation
.
Let us know what your thoughtsare on any of the tech
strategies or ideas that weposed in this podcast episode,
or if you have any ideas forfuture episodes.
(32:08):
Definitely let us know.
And with that, we'll see younext week.
Yeah, thanks for listening.
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters.
Speaker 3 (00:45):
And this is Richard, tax director.
On a beautiful spring day, thesun is shining and I feel like
I've got too much light on myface, 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 toworry about it, right,
(01:09):
fortunately?
Um, I have the face for radio,I've been told.
But uh, yeah, we got, yeah, goahead.
Speaker 2 (01:12):
A good topic today, yeah, um I I just so.
I we were just talking rightbefore the podcast and I
recently found out that I'mhaving a fourth child.
Speaker 3 (01:23):
Congratulations.
Speaker 2 (01:24):
Thank you, and so I guess this is what kind of
unconsciously gave me the ideafor this podcast.
But the idea for this podcastis involving your family in your
painting business for taxsavings.
And we recently just found outthat we're having a fourth kid.
And we did the math my wife andI and we conceived basically a
(01:50):
couple of days after we movedback from Nicaragua to the back
to the United States and becausethere was some tax savings that
we were benefiting from byliving in Nicaragua which is a
whole separate podcast on thatusing the foreign earned income
exclusion.
But bottom line is coming backto US, our tax liabilities are
(02:11):
going way up and I think thatmaybe had an unconscious effect
on her a few days laterconceiving a fourth child to get
that extra tax deduction andcredit child to get that extra
tax deduction and credit.
So today's podcast is all aboutinvolving your family in your
(02:32):
business to save in taxes.
Speaker 3 (02:32):
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 itdoes get passed, the way it's
written, it would increase thechild tax credit retroactively
for 2023.
I don't think there's going tobe.
(02:53):
There hasn't really been muchappetite to move it, so I don't
think it's going to happen.
But if it does, that wouldcertainly help.
The more kids you have, themore tax credit you get.
So that would certainly help.
The more kids you have, themore tax credit you get.
But since we can't count on thegovernment, there are some
(03:28):
great ideas that we're going todiscuss today about how you can
involve your them for when theybecome adults and want to start
businesses of their own.
Speaker 2 (03:32):
Yep, and just involving your family in general
, we're trying to give you somebasic ideas that might work to
your benefit.
So the first one is tax savingsfor kids working in your
business.
So I think a lot of folks arefamiliar with this one.
The idea is relatively simple.
The execution is a little bitnuanced so, but we actually had
(03:52):
a whole podcast just on thistopic.
But the idea is to hire yourkids into the business to do
work that you would pay someoneelse to do so.
The kind of the basic idea hereis most state laws into the
business to do work that youwould pay someone else to do so.
(04:14):
The basic idea here is moststate laws allow for kids to
work that are at least 7 yearsold, and so you could hire your
7-year-old, 8-year-old, etc.
To work in your business, havethem do tasks like stuffing
mailers, hanging door flyers,those types of things for the
younger crowd, maybe a littlebit more advanced things for
your teenagers, managing yoursocial media, whatever the case
(04:35):
is, and then you pay them areasonable wage, which you would
pay someone else to do the samework, and those payments to
your kids will be tax deductibleto the business and then the
earnings that your kid has willbe deductible up to the standard
(04:56):
deduction, so they canbasically get tax-free money
from you.
It'll be earned income to themand it should be mostly tax-free
, with the exception of beingpayroll taxes, and then there's
a deduction for the business andyou can get a little bit more
fancy with this strategy.
But that's the basic idea.
(05:17):
Was there anything I missed onthat one?
Speaker 3 (05:19):
Yeah, I really appreciate that you mentioned
hiring them to do things thatyou would pay other people to do
and having them doage-appropriate tasks, because
when you mentioned that, there'snuance in the execution, I
think that is where most peoplefail to execute this properly.
We get really excited about theidea of transferring money
(05:43):
tax-free to our children, butthis isn't a tax avoidance
scheme.
This has to be legitimate workand so the way you back that up
is you.
You know, just like you wouldwith any other employee, you
keep logs or records of thehours worked and you pay a
reasonable rate.
(06:03):
You know A reasonable rate forstuffing envelopes is not $200
an hour.
So definitely get them involved,definitely pay them, but it
needs to be appropriate.
And if you've seen, maybe someinfluencers or some folks on
social media say, well, you know, my 10 month old is a social
(06:27):
media model for my company andthey wear my branded t-shirt and
I pay them $10,000 for a photoshoot, that is not going to pass
muster under examination.
So it's very, it's verycreative and I'm sure, I'm sure
your kid is absolutely beautifuland you, you probably would pay
ten thousand dollars for theirphotos.
(06:47):
But you know, necessary andordinary business expenses are
going to be the key there You'rescrewing up my whole tax plan
for this year.
Speaker 2 (06:58):
I have my kids have matching shirts, bookkeeping for
painters, and you're telling meI can't, I can't just write
that off and pay them tenthousand dollars a piece to wear
those shirts um, you can dowhatever you want.
Speaker 3 (07:12):
I'm just saying that, uh, it probably wouldn't pass
an audit or an examination.
I mean, I don't know, the irsis gonna look at your kid and be
like, okay, well, your kids areabsolutely adorable and deserve
an exception to the rule.
No, no, Reasonable workappropriate for their age is
(07:33):
definitely the key there.
So you know, this does kind ofbring us up against certain
limitations, because you knowwhat is a reasonable hourly wage
for these admin tasks $15 tomaybe $25 an hour, depending on
their age and the complexity.
Then how many hours are theyactually working?
It might not be easy to get upto the full $14,000 standard
(08:00):
deduction, so we might betempted 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 thatthis is legitimate work.
You also mentioned payroll taxes, and you know that's.
You know your social securityand your Medicare tax.
(08:20):
Now there is an exception forchildren who work for their
parents in what's known as asole proprietorship.
So if mom and dad are the onlyowners of the business and the
business is not taxed like acorporation, then there is an
exemption for the kids when itcomes to payroll tax and they
(08:43):
can actually pay them wages andnot have to pay Social Security
or Medicare.
However, if your company is setup like an S corporation or
taxed as an S corporation, thenwe 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 haveto pay that payroll tax or FICA
(09:07):
on their wages.
Now some folks have been able tokind of work around this by
establishing a family servicecompany, and what that is is a
legitimate business that doesadmin and other type of
service-oriented roles forcompanies.
(09:31):
So your family service companycould provide cleaning services,
it could provide office work,it could provide social media
services, whatever legitimateservices it provides and then it
could contract with your Scorporation and other S
corporations or other businesses.
(09:53):
And then, because that familyservice company is a sole
proprietorship owned only by momand dad, then the kids wouldn't
be subject to that FICA ontheir wages.
But just a word of cautionagain we're not setting up tax
avoidance schemes.
Those aren't legal.
(10:13):
So our family service companyshould have at least some
for-profit motive.
I would like to show at least alittle bit of profit each year
from that family servicescompany and that profit would be
subject to self-employment tax.
So be careful there.
And we also want to make surethat you know we're at least
(10:38):
open to contracting with othercompanies besides just the
S-corp that mom and dad might beshareholders in.
So legitimate business,legitimate work, keep everything
on the up and up and it shouldbe fine.
Speaker 2 (10:54):
Yeah, and then there's another cool thing since
your kids get getting involvedso early with your business,
they can start using the powerof compound interest to their
advantage, because they have somuch time left in their lives,
and this is where they couldstart a Roth IRA, start putting
that earned income into a RothIRA and then, after five years,
(11:18):
they can start taking out theprincipal.
Well, one, the interest isgoing to grow tax-free, and then
, two, after five years, you canwithdraw the principal and put
that towards, maybe college orgoing to trade school, whatever
the case is, and so this is anexcellent retirement vehicle for
that tax-free earned incomethat they're going to be making
(11:40):
in your business.
Putting that tax-free earnedincome into a Roth IRA and then
it's going to grow tax-free andthen you can use it.
They could use it for collegeor trade school or wherever the
case is.
Speaker 3 (11:51):
Yeah, I love the opportunities that opens up when
your kids have earned incomeBecause, like you said, you're
not paying taxes on that earnedincome and so normally with a
Roth it gets taxed on the way inand it doesn't get taxed on the
way out.
And here you're kind of doubledipping, right You're not paying
taxes when it goes in andyou're not paying taxes when it
(12:12):
comes out.
And, like you mentioned, youcan use that almost like a
savings account if necessary, tokind of supplement other
tax-advantaged savings accountslike Coverdales and 529s and
things like that, yeah, and it'sabsolutely unheard of to get
tax-free on both in and out.
Speaker 2 (12:34):
So this is like a rare opportunity.
Got to really stomp the flooron this one.
And a cool anecdote, peterThiel.
He used a Roth IRA to purchaseFacebook back in the day, like
back when it was first startingup, and now it's worth like
billions of dollars because itall grew tax-free.
(12:54):
He had paid no taxes on allthat growth.
And that's like an amazing uhanecdote on someone using the
roth roth ira to its fullpotential oh yeah, you know
they're very powerful.
Speaker 3 (13:06):
um, I will get off on a tangent into a retirement
episode, but um, yeah, any theroths, um different accounts
that are like Roths, like HSAs,for example super powerful ways
to compound interest and buildwealth and not have to pay taxes
on it.
And what's cool, too, is atraditional IRA is subject to
(13:30):
things like required minimumdistributions.
They make you take your moneyout when you hit 70, 71 years
old.
Roths are not subject to that.
You can pass that moneytax-free onto the next
generation.
So we just mentioned about howa Roth can be passed on to
future generations tax-free.
(13:50):
Another way to kind of transferwealth to your future
generations would be equity inyour company, but timing it so
(14:11):
that you don't pay taxes on that.
Transfer.
Grown, this amazing companythat's worth tens of millions of
dollars and now you want totransfer that onto your heirs at
some point.
Well, when that happens, theIRS is going to look at the fair
market value of that companyand assess gift taxes on it.
(14:32):
Now we are able to transfer adecent amount of gifts to our
kids and others, but there is acertain limit.
Right now, the lifetime limiton that is around $14 million.
I do believe that's going to becoming down a little bit.
They kind of pumped it uprecently temporarily, but if you
(14:56):
structure this in a way whereyou give the equity early in
life, you would be wellunderneath that limit and you
may not even need to file a gifttax return if you keep it low
enough and you do this earlyenough.
It low enough and you and youdo this early enough.
Speaker 2 (15:14):
It 14 million might seem like a lot, but this is
over the entire, your entirelife.
You can only give away 14million without getting taxes.
So if you, if you hit all yourgoals and you're just killing
your painting business and youyou know plenty of painting
businesses can hit 10 millionmillion in revenue and therefore
(15:36):
the value of their company isworth over $10 million, and then
you have that cash flow comingin.
Maybe you're gifting tocharities, to your family,
whatever it is, so that $14million can be given away over
the course of a lifetime easilyif you become wealthy and hit
your goals.
So this could definitely applyto you, especially for those
(15:58):
that are really determined, andyou might be surprised on how
quickly you can burn up allthose gifts, that gift tax limit
and, like you're saying,richard, giving equity early.
You can avoid all that hassleBasically if you give some
equity early.
If you know, hey, I'm just kindof early, I'm in my 30s, my
(16:20):
business is still.
I'm just doing a million or twoor maybe less, but I still want
to grow.
I'm going to be in business forthe next 20 years, so it's
going to grow even more thanthat in the coming timeframe so
I can give a portion of thebusiness to my kids now and
maybe avoid having to evenreport it if it's under the
(16:42):
yearly threshold and thendefinitely not have to pay any
gift taxes on it.
And so when that businesstriples, quadruples, 10x over
the course of many years, youavoid all that gift tax.
So this can be a reallypowerful way to transfer wealth
from yourself to your kids oreven your grandkids.
Speaker 3 (17:05):
Yeah, you mentioned, if you do it in small enough
chunks you might not even haveto report it.
So they have what they call agift tax exclusion, which is an
amount each year you're able togift and you don't even have to
let the IRS know.
So it does not count againstyour $14 million lifetime limit
For 2024, that amount is $18,000.
(17:28):
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 worryabout reporting it.
It doesn't count against yourlimit and that is $18,000 per
spouse.
So if you and your spouse areboth shareholders in the company
(17:50):
, you could both conceivablygift 18,000 each, or a total of
36,000, you know to a child and36,000 to another child, and be
able to give them that equityearly and then you watch it grow
down the line.
So I think, Daniel, you weresaying that Sam Walton made
(18:16):
really good use of this tactic.
Speaker 2 (18:19):
Yes, sam Walton, the founder of Walmart.
He did this early with hisfamily.
He basically gifted them equityin Walmart before it went
public, when it wasn't worthnearly as much.
It was definitely not abillion-dollar company, he had
just started it.
He involved his family early,gave them equity and then, as
(18:40):
the company grew and then as itwent public, worth billions, he
didn't have to worry aboutgetting hit with that gift tax
to pass on that wealth, becausethey already had all the wealth
that he had, which was basicallyall in his business, because
they already had all the wealththat he had, which was basically
all in his business.
Speaker 3 (19:04):
So he made a great, really key strategic move early
on by transferring wealth early.
Yeah, can you imagine gettingequity in Walmart 40, 50 years
ago and what it would be worthtoday?
It's just kind of mind-bogglingand the fact that they won't
have to pay taxes on thattransfer of wealth is pretty
(19:26):
great yeah.
Speaker 2 (19:27):
They're worth multiple millions and they never
had to pay a cent in taxes forthat.
I mean because you don't haveto pay taxes on assets that you
are not.
Unless you sell the asset, youdon't have to pay a cent in
taxes for that.
I mean because you don't haveto pay taxes on assets that you
are not, unless you sell theasset.
You don't have to pay taxes onan asset that's just growing in
value.
Speaker 3 (19:43):
Yeah, I appreciate you clarifying that, because I
thought about that.
Like, well, they don't have topay taxes on it unless they sell
it, and then that's a differentstory.
There's ways around that too.
I mean there's.
But you know, live, borrow anddie is an interesting strategy
(20:03):
there, but that's for adifferent episode.
All right, how about?
You know?
We kind of touched on this alittle bit earlier but how about
retirement plan participation?
Them this a little bit earlier.
But how about retirement planparticipation?
So your kids are working in thebusiness Now they have earned
income, now they can set upthings such as Roth IRAs.
(20:24):
What if they go over the $14,000or so standard deduction and
now they have taxable income?
Perhaps a company 401k or atraditional individual IRA could
help, right, because that's taxdeductible.
So if they hit $15,000, $16,000, maybe a $2,000 contribution to
(20:47):
an IRA could bring that backunderneath the threshold there.
So that, yeah, that's apossibility to get even more.
And I think the most powerfulpart of this is just the amazing
power of compound interest andhow, when it comes to that, time
(21:08):
is almost more valuable.
I shouldn't say it is.
Time is more valuable thanmoney.
It's better to put in a smalleramount of money over a longer
amount of time than it is to tryand catch up and pump extra
money into an investment accountfor a shorter amount of time.
So even just a few thousanddollars invested when the
(21:29):
children are young, that's goingto compound for 50 or 60 years
will become a tremendous amountof money at retirement age.
Speaker 2 (21:40):
Yeah, and the retirement plan in the business,
your kids could participate.
Obviously, if your spouse is inthe business, they could
participate in this.
It's just another opportunityto stash away money and shield
it from taxes.
If it's a tax-advantagedretirement account and there's
several different flavors ofretirement accounts out there
(22:00):
that might make sense for yourdifferent situation, like a SEP
IRA versus a simple IRA versus a401k and each have their
strengths and weaknesses, and weactually had a full podcast on
those different accounts andwhat might make sense for your
specific situation.
Speaker 3 (22:21):
Yeah, yeah.
Or even just a simpleindividual IRA that's held
outside of the company, Ibelieve yeah, for 2024,.
You can put up to $7,000 a yearinto something like that.
So if you don't want to set upa formal account for the company
, you can have an individualaccount and get $7,000 a year in
(22:45):
there.
Yeah, so lots of opportunitythere, teaching the children
about the power of compoundinterest.
And I tell you, there's amillion compound interest
calculators on the internet.
I'd say, go find your favoriteDave Ramsey has them, nerdwallet
has them and just play with afew numbers.
(23:07):
Just a couple thousand dollars,$5,000 at 10% annual rate of
return, which is about what thestock market delivers in the
long run.
And look at the differencebetween 30 years and 40 years,
or even 45 years.
It's absolutely amazing howmuch that can grow.
(23:29):
So what?
Yeah, so now, now, go ahead.
Speaker 2 (23:33):
I was going to say so .
The next piece is establishinga board of advisors for your
business and involving yourfamily, and we actually had a
whole separate podcast on thisas well.
But to get kind of the bigpicture here, the idea here is
you need advice to grow yourbusiness.
(23:59):
In Michael Jordan's biography,one of the main themes that
Michael Jordan was always sayingwas that he needed the input of
his coaches and he always tookthe advice that he got and
implemented it to the best ofhis ability.
So he wasn't we think ofMichael Jordan.
He was like the pinnacle ofsuccess and drive, but he was
(24:23):
also just a sponge and he wasabsorbing things from his
coaches and implementing as muchas he could, and that was
something that he always said.
He was always absorbing thingsfrom his coaches and trying to
implement and get better andbetter and better.
So we need to do that in ourbusinesses too, and we get that
from our friends and family alot of times from mentors.
We get that from our friendsand family a lot of times from
(24:44):
mentors.
So involving those people in inyour business in an official way
through a board of directors,you can get the best of both
worlds, where you're gettingadvice and counsel from folks
and you're also getting a kindof a work life harmony, as Jeff
(25:04):
Bezos would put it, uh, withyour family and your business,
where you're interacting withyour family more.
Uh, as we're all busyentrepreneurs, you know the this
is an opportunity to involveyour family in something that's
work related, but it will giveyou know, uh, bring, bring you
together, and also there aresome tax savings that you can
(25:28):
acquire from doing this, whichI'll pass to Richard to cover
that piece.
Speaker 3 (25:35):
Yeah, I was just going to mention.
You know we all get advice butit's usually very informal.
We're talking to our spouseover 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 taxsavings part of it, but there's
(25:58):
also the strengthening of yourcorporate veil and your business
structure.
Of your corporate veil and yourbusiness structure.
If you are operating a companythat is taxed as an S-corp, you
have a corporation andcorporations have board meetings
and corporations have corporatebooks that track this sort of
thing.
And having those board meetingsand recording the minutes, even
(26:22):
if it is just fairly simple,it's going to go a very long way
to strengthening your corporateveil and giving you that
protection so that if somebodycomes at your corporation with a
lawsuit because they ran intoone of your trucks or your
ladder fell on their petunias,they you know You're limiting
(26:45):
your liability so that theycan't come after you personally.
And having those board meetingshelps strengthen that corporate
veil.
It also shows the kids thatthis is serious, we take our
work seriously, they have a rolein the business and it helps
get them thinking in a businessmindset when they're young.
(27:08):
So where are you going to havethese corporate, you know board
meetings?
Well, you know you, you it's upto you as the business owner,
but oftentimes a private room ata restaurant or maybe a
conference room at a hotel wouldbe the ideal place to hold a
meeting, you know, with five,seven or nine board members and
(27:31):
there could be some legitimate,you know expenses involved with
that.
There might be travel expensesinvolved, there's probably some
food and beverage expensesinvolved.
As long as these things areassociated with the board
meeting, they are 100% taxdeductible.
So if you're going to have aboard meeting at a private room
(27:54):
in a restaurant and you're goingto talk business for 30, 45, 60
minutes, whatever yourrequirements are, and then have
a meal, that is a business mealand everyone's drinks and food
and you know dinner is awrite-off.
So it kind of serves twopurposes.
(28:15):
One, the board meeting.
That's the primary purpose.
It is a business meeting.
But two, it gives you a chanceto, you know, connect with
people you're close to close to,whether they're family or
you're building those businessrelationships with other
business owners who are on yourboard.
It can be a really enjoyabletime.
Speaker 2 (28:38):
Yeah.
So just to recap, I think wehit many different topics here.
So the first thing explore theidea of hiring your kids in your
business.
There could be some tax savingsavailable to you Also getting
your family involved, your kidsinvolved, in building that work
(28:59):
ethic and giving themopportunities to save money on
taxes by saving early, puttingtheir savings in a Roth IRA and
setting them up for trade schoolor college.
Then, number two considertransferring equity early,
either to your spouse or to yourkids or grandkids when the
business is smaller.
(29:20):
Because if you're going to be inyour business for the long term
, for decades, and you have agrowth mindset, you hopefully
will grow your business manytimes over.
So transfer the equity early soyou can avoid those gift taxes
or estate taxes.
Definitely explore retirementplans for either on the personal
(29:44):
side or in the business to takeadvantage of compound interest
and set your family up forsuccess and have them
participate in those companyretirement plans.
And then, number four establisha board of advisors for your
company and get your familyinvolved to get them involved in
the business for your companyand get your family involved to
(30:07):
get them involved in thebusiness, so you're getting that
advice and also have thatformalized and build up that
corporate veil in yourcorporation or your LLC, and
then also realize the taxsavings of basically being able
to write off official functionsthat involve your board of
directors, who would also beyour friends and family.
(30:28):
So was there anything else thatI missed on the wrap up there,
richard?
Speaker 3 (30:34):
I think you did a great job recapping those points
.
I just love the idea of ourbusinesses are our babies and be
able to involve our family inthat and have them work with us
towards something that is someaningful and so important to
us.
If it's done right, I think canbe really powerful.
(30:57):
And I love the idea of beingable to set up the next
generation with these skills andabilities when they're young,
up the next generation withthese skills and abilities when
they're young, helping themunderstand how business works,
helping them know what a workethic is and also helping them
find that work-life harmony sothat when they are adults and
(31:18):
they are out in the world makingmoney themselves, they are
going to be well ahead of thegame because they're going to
learn a lot of things at a youngage that a lot of us had to
learn the hard way, and sothey're going to have that step
ahead.
So I think it's a wonderfulthing to do.
Yes, there are definitelyfinancial and tax benefits, but
(31:38):
I think there's a lot of justintangible benefits to having
your family involved in yourbusiness too.
Speaker 2 (31:47):
Absolutely Cool.
Well, we would love to hearyour thoughts.
If you go to Grow your PaintingBusiness in Facebook and send
an invite, we'll accept youDefinitely join the conversation
.
Let us know what your thoughtsare on any of the tech
strategies or ideas that weposed in this podcast episode,
or if you have any ideas forfuture episodes.
(32:08):
Definitely let us know.
And with that, we'll see younext week.
Yeah, thanks for listening.
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If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.