| Hiring your children in your business can be a great tax | | | | Note: You may have heard of the "kiddie tax". Earned |
| savings strategy, as well as a way to teach your | | | | income, including wages that you pay your children, are |
| children about business and money. | | | | not subject to the "kiddie tax" rules, regardless of their |
| Wages paid to your children (between the ages 7 and | | | | age. |
| 17) are a valid business deduction, as long as they do | | | | Example: In 2008, you can pay your child up to $5,450 |
| bona fide work, and they are compensated fairly. | | | | (the standard deduction amount in 2008) before either |
| Your children can earn up to $5,450 (the standard | | | | one of you would incur any taxes. Suppose you are in |
| deduction amount for 2008) before they will owe any | | | | the 28% tax bracket and you pay your 15-year old |
| income tax. Because you are getting a business | | | | son $5,000 over the course of the year to perform |
| deduction for the wages paid to your child, this is | | | | office related tasks. |
| income that you also will not pay taxes on. | | | | You get a business deduction for the wages paid to |
| In addition, if your children are under age 18, you don't | | | | your son, saving you $1,400 (28% of $5,000). In addition, |
| have to pay Social Security or Medicare taxes on | | | | this reduces the amount of profit that is subject to self |
| them. You do not have to pay unemployment taxes | | | | employment taxes (15.3% of $5,000 = an additional tax |
| on them as long as they are under age 21. This is a | | | | savings of $765). Your total tax savings in this |
| huge tax savings since you would have to pay these | | | | example is $2,165. |
| taxes on any other employee you hired. | | | | Since your son's earnings are less than the standard |
| Even if you pay your children more than the standard | | | | deduction amount, he does not owe income taxes on |
| deduction amount, you will still come out ahead. In most | | | | his earnings. In addition, because your son is under age |
| cases, your children will be in a lower tax bracket than | | | | 18, you do not have to pay Social Security, Medicare |
| you, so by paying them a wage, you are shifting | | | | or unemployment taxes on him like you would with a |
| income from your higher tax bracket to their lower tax | | | | regular employee. |
| bracket. | | | | Action: If you have children between the age of 7-17, |
| Strategy: If you are paying your children more than the | | | | consider putting them on the payroll. You will need to |
| standard deduction, they can shelter even more | | | | keep time sheets showing the dates, hours and |
| income from taxes by opening an IRA account. | | | | services performed. You should also write them a |
| Hiring your children does not raise a red flag with the | | | | check to substantiate the wages. |
| IRS, but you should document your children's salary | | | | Filing Guide: You will need to file quarterly payroll tax |
| and services provided to audit-proof your tax return. | | | | reports (Federal Form 941, state payroll tax forms) for |
| To do this, keep a time sheet showing the date, hours | | | | your children (even though no taxes are due). In |
| and services provided by your children, and write them | | | | addition, you will need to file a Form W-2 for your |
| a check for their wages. | | | | children at the end of the year. |