- May 31, 2017
- Posted by: Smith & Smith
- Category: Tax Planning
Since summer is just around the corner, why not kill two money birds with one stone and hire your kids to work for your business?
You can save up on taxes while helping them understand the real meaning of financial responsibility and hard earned money.
Placing children under eighteen on the payroll, or even your grandchildren is a brilliant strategy to minimize tax liability.
By employing your kids, you are simply fishing money out of your tax bracket and putting it into a kid’s zero percent tax bracket.
Say Goodbye to Taxes
According to experts in this field, children under the age of eighteen can earn up to $6,100 annually tax-free. As for parents who hire those children, they are incredibly fortunate since they won’t have to pay for social security and Medicare taxes on salaries paid to children under the age of 18. That is why this is a win-win situation for the whole family.
Experts also recommend treating children over the age of eighteen as either subcontractors or employees. This will require you to issue a 1099- MISC form in the beginning of the year if they were hired as subcontractors.
The second option is to start a W-2 tax form and withhold payroll taxes if they were hired as employees. It is important to keep in mind that this tax-saving opportunity is open to sole proprietorships where you are the sole owner of the business.
Real Jobs Not Family Chores
In order for you to make the best out of this situation, you must assign your children actual tasks to complete. They need to feel like they’ve contributed to your business and performed services that deserve a reasonable salary.
Documentation Is Needed
The services completed by your children as well as their salaries must be documented. Using a time sheet or calendar to record their completed hours of work plus the salary paid each month is a very important step.
Experts also recommend that you match the responsibility to the age of the child. Doing so will prevent any unnecessary confusion regarding his/her role in the business.
It will also encourage your child to build his or her confidence in the workplace.
Gift Your Kids a Retirement and College Savings Account
Invest in your children’s future by encouraging them to save money. They might be living in the now, but opening a savings account can be their foundation for a financially stable future.
Once your children have earned a proper salary, they can officially contribute to a Roth Individual Retirement Arrangement also known as IRA.
These Roth contributions can later be used for their college expenses so they don’t end up getting stuck in the endless cycle of paying student loans and giving up their dreams while sinking in debt. This money will grow tax-free throughout their lives.
This practical, money saving strategy can be life-changing for you and your family. It can bring you all together while teaching your children priceless life lessons.