How Paying Your Child Can Lower Your Tax Bill

Could you use some extra help in the business and an excellent tax write-off? Putting your children to 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, and kick start their retirement or college savings plan.

Avoiding Payroll Taxes for a Single Member LLC and Sole Proprietorship

Many business owners don't realize that you are not required to withhold any payroll taxes when you're paying your children under 18 in an Single Member LLC or Sole Proprietorship.  This is the dreaded Federal Unmployment Tax Act (FUTA), State Unemployment Tax Act (SUTA), and Federal Insurance Contributions Act (FICA) taxes we all hate to withhold and match for our 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 $12,200 of income this year because of the Standard Deduction. Pay someone who isn't a relative to work for you, and they take that $12,200 of tax-free income home with them. Hire your child, and you keep it in the family.

Create a Retirement and College Savings Account

An incredible side benefit to this strategy is that once your kids have “earned” income they can now contribute to a Roth or Standard IRA. In fact, the Roth IRA contributions could be pulled out later for college expenses penalty and tax free (the earnings, of course, will continue to build and grow with the Roth IRA). This is a great opportunity to kick-start their retirement savings or even college savings plan with tax-free dollars or income at their tax bracket.

To Qualify Your Children Must Actually Work

Do not hire your children simply to do "family chores." They have to be legitimately involved in the business. If the Internal Revenue Service audits you, you'll have to produce records of their time worked, and you'll have to demonstrate that the wages paid were reasonable.

Pay your children for services they perform for your business, and you'll actually generate an expense for your income taxes.. To discuss further how to properly implement this strategy in your business, please contact JLD Tax at  www.jldtax.com .