Hire your child to save taxes
Is your child looking for a summer job? – look no further than your own company. A business
owner can shift income from business earnings to their child’s wages tax free while at the same
time, saving them thousands of tax dollars.
ADVANTAGE TO YOU – THE BUSINESS OWNER
Your child provides needed assistance as it is hard to find good people to fill job openings.
Your child’s wages are deductible saving you on the amount of income taxes you pay.
Your deduction stays in the household as those earnings pass to your child tax free (later
discussed).
You save money since their wages are exempt from FICA tax as well as unemployment taxes.
ADVANTAGE TO YOUR CHILD
Your child gains valuable work experience in a tightening job market.
Your child receives compensation while providing these services to your company.
Your child can earn up to $12,000 tax free (no income tax on those earnings).
Pay them an extra $5,500 and shelter it tax by making a tax-deductible contribution to his own
IRA.
RULES
Child must be less than 18 years of age to be exempt from payroll taxes (FUTA = 21)
Child must be a legitimate employee providing legitimate services at a reasonable wage
Business isn’t incorporated or a partnership – applies to a sole proprietor business owner only
EXAMPLE
Owner in 24% federal and 6% state tax bracket pays child $12,000 saving $3,600 in income taxes
and $1,284 in payroll taxes for total savings of $4,884. Child receives gross earnings of $12,000
versus net of tax and receives the money tax free. Additional $5,500 could be sheltered by
contributing to a tax-deductible IRA in the child’s name.
Eric T Hersman CPA August 2018
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