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SPEAKING OF FATHER'S DAY!....
Could you use some extra help in the business this summer and an excellent tax write-off? Putting your children work in your business, even if only for the summer, is one of the most underutilized tax-saving strategies today. It can also be a great way to teach your kids some work ethic, money-management skills, and kick start their retirement or college savings plan.
I've found that many business owners simply don't realize placing children under the age of 18 on the payroll, or even grandchildren or adult children, is an excellent strategy to minimize tax liability.
However, there are procedures you need to follow if you hire your children, and it is important you follow the right procedure or it could backfire on you.
Not Withholding. A Simple and Easy Strategy
Many business owners and parents don't realize that it’s not required to withhold any payroll taxes when you're paying your children under 18. This is the dreaded Federal UnEmployment Tax Act (FUTA), State Unemployment Tax Act (SUI), and Federal Insurance Contributions Act (FICA) taxes we all hate to withhold and match for our employees. Moreover, in almost every state you can waive your children out of any Workers' Compensation coverage, just like yourself, because you cover them under your family medical plan.
•This provision to not withhold payroll taxes from your children under 18, only applies to Sole Proprietorships or a Limited Liability Company (LLC) taxed as a partnership and owned by mom and/or dad. However, if you have an S- or a C-corporation you do not receive this benefit of avoiding payroll taxes when paying your children. If you pay your children out of a corporation, you'll have to withhold payroll taxes. •To avoid the withholding problem, if you are an S- or C-Corporation, I recommend you pay children out of a family management company. This is established as a Sole Proprietorship owned by mom or dad to support the operations of the Corporation, and the family management company is then paid a management fee by the Corporation. This can be an excellent central entity to hire the kids and provide independent services to one or more of your companies. •If you are paying children over the age of 18 or grandchildren, you have the option of treating them as either as subcontractors or employees. You will thus have to issue a 1099-MISC form next January if they are truly acting like a subcontractor, or start a W-2 and withhold typical payroll taxes if they are employees.
Your Children Shouldn’t Pay Taxes Either
Another exciting aspect to this strategy, is that all of us, including our children don't pay federal income taxes on the first $6,300 of income this year. It's called the Standard Deduction. Pay someone who isn't a relative to work for you, and they take that $6,300 of tax-free income home with them. Hire your child, and you keep it in the family. Plus, you can still claim your children on your tax return as a dependent and take the exemption, even take the Child Tax Credit.
Some business owners ask: "What about the 'kiddie tax'? Aren't the kids going to end up paying taxes on their income at our rates anyway?" The answer is no. The kiddie tax only applies to unearned or "portfolio" income and if the children are working in the business it will clearly be “earned” income.
Keep It Legitimate