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.
(article continued below ...)
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 family members.
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
- The children actually have to work
- Pay them consistently
- Pay them according to what you'd pay someone else
- Keep detailed records
- Issue a W-2 at year end and file a tax return for the child, even if
no tax is owed
Example:
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 childcare).
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.
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
June 16, 2005
| 
