| Parents: Did you know that you can hire your kids in | | | | wages paid from an employer. Why? Well, kids don't |
| your small business and reduce your taxes? | | | | have to pay taxes on the first $5,700 of earned |
| Hiring your children if you own your own business is a | | | | income, even if they are claimed as a dependent on |
| great tax planning strategy, but it's more than just a | | | | their parents' tax return. |
| tax deduction. Here are a few ways you can save | | | | Here's an example: |
| taxes by hiring your children in your small business: | | | | Let's assume Teddy, who is 14 years old, has a web |
| 1. You get a tax deduction for the wages you pay | | | | design business. In 2009, he expects to earn $5,000 |
| your kids, which reduces your taxable income | | | | from this business after all of his expenses. |
| 2. By paying your children, you are effectively | | | | If Teddy is the owner, he is considered self employed |
| transferring income from your higher tax bracket to | | | | and will have to pay 15.3% in self employment tax on |
| your childrens' lower tax bracket | | | | this income. Assuming this is his only income, he won't |
| 3. You reduce your self employment income, thus you | | | | owe any federal income tax because his total |
| also reduce your self employment tax | | | | earnings are less than the standard deduction amount |
| 4. Your kids may not owe any tax on the amount you | | | | ($5,700 in 2009), but he will still have to pay self |
| pay them, depending on how much they earn and | | | | employment tax on the net profit. Teddy's total tax in |
| whether you claim them as a dependent or not (in | | | | this example will be $765. |
| 2009, dependent children can earn up to $5,700 before | | | | Now let's assume that Teddy's dad is the owner of |
| they will owe any income tax) | | | | the business and he hires Teddy to do the work. |
| 5. Paying your children a wage allows them to open an | | | | Teddy still makes $5,000 from this business, but |
| IRA or Roth IRA, which gives them a jump start on | | | | because he is an employee instead of the owner of |
| saving for retirement, college and other goals | | | | the business, he doesn't have to pay self employment |
| If you have entrepreneurial kids, consider starting the | | | | tax. Teddy's dad will report the $5,000 in income on his |
| business in your name and hiring your children instead | | | | tax return, but he gets to deduct the $5,000 he pays |
| of having the kids own the business. This will reduce | | | | Teddy to work in the business, so dad won't owe any |
| your family's overall tax burden. | | | | tax on this income. In addition, because Teddy is under |
| Why would it matter who owns the business? Well, if | | | | 18, Teddy's dad doesn't have to pay payroll taxes on |
| you are self employed, you have to pay self | | | | him. Finally, because Teddy earned less than the |
| employment tax on your net earnings over $400. This | | | | standard deduction, his total tax liability will be zero. |
| rule applies to both adults and children, so there is no | | | | In this example, the family's total tax savings by having |
| advantage to being a kid when you're self employed. | | | | the business in the father's name and having the child |
| However, kids have a huge advantage if they earn | | | | as an employee instead of the owner is $765. |