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You Can Save Taxes by Hiring Your Kids

Own your own business? With summer approaching, it’s a great time to consider hiring your working-age kids, and not just because they’re family. You could save taxes in the process too!

Shifting Income
By shifting some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done by the child must be bona fide and the child’s wages must be reasonable.

Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work, full-time, during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.

Hiring Your KidsThe business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.

Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Saving Employment Taxes
In addition to saving income taxes, you could also save on employment taxes. Services performed in your business by a child under age 18 are not subject to social security, Medicare, or federal unemployment taxes (FUTA). A child over 18, but under 21, will pay social security and Medicare tax, but not FUTA taxes.

Business Criterion
There are a few business entities in which the reduction of employment does not apply: (a) a corporation, or (b) a partnership/LLC that has a non-parent partner/member. However, a partnership/LLC will qualify if each partner/member is a parent of the child.

Keep in mind, the IRS could scrutinize the hiring of your child. You need to make sure they are bona fide employees and paid a reasonable salary. Keeping track of their hours worked using time sheets and summarizing the business related services they perform will help in documenting them as employees. Work unrelated to the business (i.e., household chores) does not qualify.

Hire your kids, save taxes, and keep them busy during the summer…it’s a win-win-win situation!

If you have questions about how these rules apply in your particular situation, or would like to learn about other family-related tax-saving strategies, please contact your Sansiveri professional at 401-331-0500.