How Can Hiring Your Kids Help You Save on Income Taxes?

Hiring your children in your business can be a great tax savings strategy, as well as a way to teach your children about business and money.

Wages paid to your children ( the ages 7 and 17) are a valid business deduction, as long as they do bona fide work, and they are compensated fairly.

Your children can earn up to $5,350 (the standard deduction amount for 2007) before they will owe any tax. Because you are getting a business removal for the stipend paid to your child, this is income that you also will not pay taxes on.

In addition, if your children are under age 18, you don’t have to pay Social Security or Medicare taxes on them. You do not have to pay unemployment taxes on them as long as they are under age 21. This is a huge tax savings sinc! e you would have to pay these taxes on any other employee you hired.

Even if you pay your children more than the standard deduction amount, you will still come out in advance. In most cases, your children will be in a appear stormy tax bracket than you, so by paying them a wage, you are shifting income from your higher tax bracket to their lower tax bracket.

Strategy: If you are paying your children more than the standard deduction, they can shelter even more income from taxes by opening an IRA importance.

Hiring your children does not raise a red flag with the IRS, but you should document your children’s allowance and services with the understanding to audit-proof your tax return. To do this, keep a time sheet showing the date, hours and services provided by your children, and write them a bar for their wages.

Note: You may have heard of the “kiddie tax”. Earned , including wages that you pay your children, are not subject to t! he “kiddie tax” rules, neglectful of their age.

Exa mple: In 2007, you can pay your child up to $5,350 (the standard deduction amount in 2007) before either one of you would contract any taxes. Suppose you are in the 28% tax bracket and you pay your 15-year old son $5,000 over the course of the year to perform office related tasks.

You get a business deduction for the wages paid to your son, saving you $1,400 (28% of $5,000). In addition, this reduces the amount of profit that is subject to self employment taxes (15.3% of $5,000 = an additional tax savings of $765). Your gross tax savings in this example is $2,165.

Since your son’s earnings are less than the gauge deduction amount, he does not owe revenue taxes on his earnings. In addition, inasmuch as your son is under age 18, you do not have to pay Social Security, Medicare or unemployment taxes on him like you would with a regular employee.

Action: If you have children between the age of 7-17, consider putting them on the payroll. You will need t! o keep time sheets showing the dates, hours and services performed. You should also jot down them a check to substantiate the wages.

Filing Guide: You will need to file quarterly payroll tax reports (Federal Form 941, state payroll tax forms) for your children (even though no taxes are due). In addition, you will need to file a Form W-2 for your children at the end of the year.

Sources: IRS Publication 15, Chapter 3, Family Employees

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Kristine A. McKinley, CFP, CPA, and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for withdrawal, society, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis.
For free financial planning tips, worksheets, checklists and more, visit http://www.financialtipsforwahms.com

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