Mark Kohler explains how to pay kids under 18 tax-efficiently using a Family Management Company structured as a sole proprietorship. Route payments through LLCs or side businesses as outside labor, then pay children from the Schedule C entity. Zero out the sole proprietorship's income to avoid self-employment tax.
Chapters
If we're going to pay kids under age 18, we have to look at it from 2 or 3 different angles. This is the trifecta. I'm going to split my client's life into 2 sides: operations and assets. And in a typical trifecta, let's say this is a realtor with an S corp and they have an LLC with a rental property. Boom, boom, revocable living trust. That's my trifecta: operations, holdings, legacy. Now this little bad boy in the middle is called a family management company. Now that's just a term of art. It's typically going to be a sole proprietorship, which is a Schedule C. So we're going to put sole prop. Now, when you go to pay your kids under age 18— and I'm going to put an LLC over here, let's call this the pre-S corp. So you might have a client with a side hustle, they don't have enough income to really justify the S corporation. Over here, we'll call this a main hustle. All right, so here's how you can pay your kids under age 18. You're going to pay them either out of an LLC here, which could be a Schedule E, or it could be a 1065. You tax professionals, this is easy-schmeezy, right? And we're going to call it outside labor. We're also going to pay them out of here if I have just a side hustle, outside labor. It's going to be other expense. With an S corp, I cannot pay kids directly out of my S corp. I could, but then I'd have to issue a W-2, which I do not want to do. So I'm going to pay a management fee over to a Schedule C for legitimate services and then pay my kids out of the sole prop. I'm going to zero out the sole prop so there's no self-employment tax.
