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Pay Your Kids = Save on Taxes

By December 10, 2014Business, Payroll, Tax Strategy

By Sunny McIntosh

Having kids can be such an amazing experience.  Kids enrich our lives with all sorts of predictable and unpredictable challenges.  But they can be really expensive!  If you own a business, consider hiring your kids.  Teaching them life lessons related to money starting young will not only be good for them, but also hopefully mean they won’t be living in your basement until they retire.

How does paying your kids work?

  • Children (under the age of 17) are exempt from social security, Medicare, and federal unemployment taxes.
  • Children can earn up to $6,200 for 2014 before they have to claim income, and they can put up to $5,500 in a traditional IRA to avoid paying tax on it as well. Translated, this means you can pay them up to $11,700 before they have to pay a dime of taxes on it.
  • You get a deduction for the money paid to your children as a business expense and because they are under the age of 17, you don’t pay the employer portion of social security, Medicare, and federal unemployment either.

Things to be aware of:

  • Your children need to be working for an unincorporated, for-profit business, such as a sole proprietorship or and LLC. Many of our clients create a new entity to manage some aspects like janitorial needs for their main business.
  • The work needs to be real. The wages need to be reasonable for the work performed, and of course they need to actually get paid. Documenting would be important in case of an audit. Many of our clients setup custodial bank accounts so it is your kid’s bank account, but as the parent you are a signer as well.
  • You need to issue W-2s for your children, just like any other employee.

So the benefits include:

  • Your children learn more about money and work.
  • Savings on taxes for you.
  • Paying your children does not increase your chances of being audited, and it can benefit the entire family.
  • Children can save the money to pay for college.

There are a few disadvantages to consider:

  • Suppose you put your children’s wages in bank accounts for them to use for college when they turn 18. If they turn 18 and decide to use it for something completely different, that is their option and you have no control.
  • Similarly, if they have large sums of money in a bank account they may qualify for less financial aid when they do go to college. But this is a disadvantage that may turn out to be an advantage as your child may complete more college before they have to take out a loan.

Paying you children is a great benefit. If you can find some work for them to do that will help your business you can pay them and have them buy their own food; toys, and clothes; extracurricular activities like sports, dance, etc.; and put money in savings. The chance for them to learn about money and work is compounded by the fact that you will save money on your taxes.

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