Hiring your Children

December 13, 2019

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Video Transcription:

We all know the kids cost a lot of money, but there is one way where they can help you save some money. And that is by using the tax strategy to hire your child, to work in your business. If your child is age seven or older, you can add them as an employee to your business. Now, once they reach the age of 18, you’re probably done. But we’ll talk about that through your specific situation. So again, if your child is age seven through 18, we can probably employ them through your business and give you some tax benefits. First, let’s talk about sole proprietors and partnerships. There’s this, the best situation, and that they can pay their child up to $12,000. Each for services performed for the business and they have to give them a W2, but they won’t have to pay any social security or Medicare taxes.

And the child will not have any income taxes as well. Assuming they have no other sources of income. If you have an S-corp or a C-corp, you can also utilize this strategy, but you will have to pay social security and Medicare taxes. Now the social security and Medicare taxes amount to 15.3%. So if the parent’s tax rate is higher than that, it still may make good sense. So if the parents are paying in the 30% range on taxes, they’ll still say 15%. So again, the maximum that you can pay them is $12,000 and have it not have any income tax consequences, assuming they have no other income. Maybe you’d like to go further than that. You can also add $6,000 to that. So make it a total of $18,000 and allow your child to put $6,000 into a traditional IRA that will bring their taxable income back to $12,000 with no tax consequences, assuming no other income.

And the $6,000 can help that grow for college purposes or for retirement purposes for your child. The magic of compounding dollars can help that money really grow while your child is still young. A couple of caveats we’ll discuss in more detail if these apply to your situation, but if you have a child who’s getting ready to go off to college, you may want to talk to us about how this affects your application for financial aid. It may have some consequences near to those years, but this could be a wonderful tax strategy to implement, to help you save money. If you have any questions at all about how this program works, feel free to let me know.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.