Summer is here and it is time to consider saving taxes by hiring the kids. If you own a business you can save family income and payroll taxes by putting younger family members on the payroll. You may be able to turn high-taxed income into tax-free or low-taxed income, achieve social security tax savings (depending on how your business is organized) and even make retirement plan contributions for your child. In addition, employment of a child under age 18 (or if a full-time student, age 19–23) may be a way to save taxes on the child’s unearned income.
Here are the key considerations:
Turning your income into tax-free or low-taxed income.
You can turn some of your income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
Example:
Suppose a business owner operating as a sole proprietor is in the 35% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $5,800 during the year (and doesn't have earnings from other sources).
The business owner saves $2,030.00 (35% of $5,800) in income taxes at no tax cost to his daughter, who can use her $5,800 standard deduction for 2011 to completely shelter her earnings. The business owner could save an additional $1,750 in taxes if he could keep his daughter on the payroll for a longer period and pay her an additional $5,000. She could shelter the additional amount from tax by making a tax-deductible contribution to her own traditional IRA.
More on shifting to family members next week.
