Do you have a business? Do you have children? If you answered "yes" to both of these questions you might be able to cut your taxes by hiring your kids!
I grew up working for my Dad's surveying business. Aside from the fun I had working 12-hour days outside in 100+ degrees (Typed with sarcasm!), working with my Dad put spending cash in my pocket, taught me the value of a dollar, and provided him some much-needed tax relief.
How This Process Works
Paying your child to work shifts income from you to your child. This results in income tax savings since children are usually in a lower tax bracket than their parents. This can also reduce other types of taxes since children under 18 are exempt from Social Security and Medicare taxes and children under 21 are exempt from federal unemployment taxes.
For an example of how this process works, assume you are in the 28% tax bracket. You would pay approximately $4,330 in total taxes on the last $10,000 you earn.
Now assume you paid this $10,000 as a salary to your minor child instead of keeping it and paying taxes on it yourself. After taking the standard deduction of $5,800 (tax-year 2011), your child would have taxable income of $4,200 and would pay around $420 in taxes. This is a tax savings of $3,900 dollars!
Parent’s Total Tax: $4,330
Child’s Total Tax: $420
Tax Savings: $4,330 (Parent's Tax) - $420 (Child's Tax) = $3,910
Although this example is certainly overly simplified (Apologies to my CPA and EA friends!), it gives you an idea of how much you could save by paying your child to work in your business.
Four Rules to Follow
Here are four tests that must be passed before the IRS will allow you to deduct money you pay your children:
1. The services provided by your child must be ordinary and necessary expenses directly related to your business.
2. The amount paid to your child must be reasonable.
3. The services must actually be performed.
4. You must have incurred the expense in the year you take the deduction.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
