ORDINARY & NECESSARY
This blog is LONG overdue. Over the years and moreso the past two to three years a client asks us about employing their children as models because they heard it from a colleague or at a study club meeting or at a seminar. Many times it’s the seminar speaker, who may even be a CPA, suggesting this strategy. Well, I’m here to tell you it’s probably the LEAST defendable “job” in an IRS audit that you should hire your child. Remember, the seminar speaker who promotes it is NOT your CPA and not the one who will be signing your tax returns or assisting you in an audit. And the colleague you hear it from likely saw it posted somewhere on social media or they’re using a CPA who bought into the strategy without really thinking about it. Here’s why you need to think twice before jumping on the modeling bandwagon.
First, let’s talk about the Internal Revenue Tax Code as it relates to business expenses. There are two VERY important words within code section 162 and they are ORDINARY and NECESSARY. In short, it means that for an expense to be deductible by a business it should be ordinary and necessary to the operation of that business.
When it comes to employing your child as a modal, ask yourself these questions:
1. Have you had to employee anyone else as a model in the past?
2. Will you employee anyone else as a model now or in the future?
3. Does your practice need to employ a model to operate?
I can give you the answer to those questions, the answers are absolutely NO! Yet, there are those that believe that employing a model is ordinary and necessary to the operations of your dental practice. I’m of the opinion you’ll have an uphill battle trying to defend the position.
Imagine you’re audited and the agent asks you to justify paying your kids as models and you suggest you use their image in pictures in the office, on your website and your social media posts. Then the agent looks at your practice website and social media pages and notices pictures of your patients or your staff and asks, “did you pay these folks a modeling fee as well”? The answer is NO! Then the agent asks if you had employed any models before your kids, the answer is NO! Then the agent asks, “well how is it you were able to run your dental practice without employing a model in the past and all of a sudden you need one now?” That’s going to be difficult to answer and defend with a straight face….in my opinion.
The fact is there are so many other tasks that are more easily defendable under an IRS audit. Many of these tasks are already being performed by one of your employees and are clearly ORDINARY & NECESSARY. Determining the market rate to pay for these tasks is also straight forward. You’re already paying your front desk person $15-$20/hour, an assistant $18-$25/hour or a hygienist $35-$50/hour to perform some of these tasks so you’ve already established a market rate, right? You won’t have to be concerned about how you arrived at a market pay rate.
We have a list of twenty-five tasks a family member can handle for your dental practice including kids as young as four or five. Here’s just a sample of tasks your kids can perform that will be easily defended if audited; stuffing the goodie bags, shredding paper, emptying trash cans, stuffing envelopes, restock and organize supplies, etc. Think about that, you’re already paying someone to handle these tasks and nearly every other dental practice across the country employs someone to perform these tasks. They are ORDINARY & NECESSARY to a dental practice.
So, the next time someone tells you that you should be employing your children as models please think twice about that strategy. Don’t jump on that bandwagon as it may lead you straight into trouble under an IRS audit. Instead, review the tasks you’re currently paying an employee for and determine if your kids can handle those tasks. You’ll likely be able to pay them more and be able to easily justify and defend it if audited by the IRS.