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Pay Your Children to Work for You with the Blessing of the IRS
|Save on Taxes
by Hiring Your Children
You've heard that you can't have your cake and eat it, too. But
hiring your own family is one case when you can. Pay your minor
or adult children to work for your business, then write it off
as an expense.
Many people are confused about whether it's legal to hire their
children and grandchildren. Follow my advice to satisfy both the
IRS and employment laws - while saving on your own taxes. Assuming
it's a true payment for services performed (and the paperwork
is handled properly) it's totally legal and acceptable to pay
Minor Children Save the Most Taxes
Child labor restrictions don't apply to a parent (unless it's
in manufacturing, mining, or any hazardous occupation defined
by the Department of Labor) - even under 16. I hired my own daughters
from the ages of 7 and 9 without a hitch.
You need not pay withholding income taxes, payroll taxes (including
Social Security) and Workmen's Compensation (in most states) until
the child turns 18. Just remember to complete quarterly payroll
tax returns, as you must for any employee. Forget about paying
federal unemployment taxes until the child turns 21.
However, if your business is an S or C Corporation, you must pay
Social Security and Medicare taxes regardless of their ages.
To Survive IRS Scrutiny
1. The children actually have to work
2. Pay them consistently
3. Pay them according to what you'd pay someone else
4. Keep detailed records
5. Issue a W-2 at year end and file a tax return for the child,
even if no tax is owed
Wages paid to 13 year old child $6200
Less: Standard deduction for 2005 (5000)
Taxable income $1200
Tax Due (10% x $1200) $ 120
While for the parents:
Wages paid to the child $6200
Tax Savings (40% x $6200) $2480
For a net savings to the family of $2360
The income tax standard deduction is $5000 for every person in
the country, including each of your minor children. So unless
you pay them more than that, they won't have any tax obligation
at all. And since they really earned it, the "kiddie tax rules"
do not apply.
When hiring adult family members you can justify larger salaries.
And they can participate in benefits like qualified retirement
benefit programs and fringe benefits (like medical insurance and
Working for You Teaches Children about Managing Money and Saving
The income has to be earned by the child, so the amount needs
to reflect the value of what's done. And the money does belong
to them, even if it's being saved for college.
Many of the benefits of involving your children in your operation
aren't tax-related at all. They're gaining practical experience,
learning the value of work, and maybe how to carry on the family
business down the road.
If you're wondering whether to trust my advice, I've sat on both
sides of the desk. I worked for the IRS, and since leaving there
have conducted almost a thousand seminars on financial planning
and taxes. I speak to real estate and banking professionals all
over the country, and have found that everyone wants to learn
smart strategies that bring reliable financial returns - without
getting them into tax trouble. In my opinion, hiring your family
is one of them.
Don't hesitate to put the troops to work. When you hire your children
you're teaching them skills they'll be able to use for the long
haul. They're learning the value of a dollar - and how hard you
have to work to earn them. And bottom line, it makes good financial
sense as well.
© 2005, Chris Bird
About the author:
Chris Bird Conducts 150 seminars a year for Real Estate and Financial
professionals Wealth building, financial planning, residential
rentals, tax strategies, accounting Certified Financial Planner
(CFP) IRS Enrolled Agent Chris@ChrisBirdSeminars.com
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