Hiring your children who are under age 18 to work in your company can create substantial tax savings. If done properly, wages paid to your child are FULLY deductible as a business expense. This means you can reduce your earnings at your highest marginal tax rate and shift those taxable earnings to your minor child at their LOWER rates. Your child under 18 can even earn up to $6,300 before ANY tax must be paid on their income for tax year 2016. This can be increased to $11,800 if a traditional IRA is established for the child and a contribution of $5,500 is made. As an added bonus, if your business is a sole proprietorship or a partnership between the parents, the wages paid to your minor child are also not subject to Social Security, Medicare, or federal unemployment taxes. The treatment for state unemployment tax will vary from state to state.
The advantages of this approach are sizeable, but there are steps that must be followed to hold up with the IRS. Certain actions must be taken such as filing the required IRS forms, maintaining adequate records, making sure the child takes possession of funds (as deemed by the IRS) and paying an appropriate rate of pay for work performed. The child must be treated just like any other employee of the company - meaning they need to perform work and receive wages for time worked. But don’t be put off by the paperwork, we can assist you in determining what specific steps and actions are required for your situation and make this a worthwhile endeavor.
In addition to the significant tax savings benefits, don’t forget, this strategy allows you to provide your child with spending money and valuable work experience while at the same time keeping your child busy during the summer or after school. But do talk with your trusted tax advisor before tacking action as this tax saving strategy may not be viable for all taxpayers. For example, if the business has no other employees then adding your child will create quarterly and annual filing requirements for payroll tax returns and information returns W-2/W-3, which will cost some time and/or some professional fees.
If you would like to consider the potential benefits of this strategy for your business contact us, and we will be happy to discuss your specific circumstances.