As a follow-up to my previous post, I want to give some details on how you can save big money by hiring your kids to help you in your business.
If you are an agent filing as a sole proprietor, in a partnership with your spouse as the only other partner, or a single-member LLC filing Schedule C, any wages you pay your children to help in your business are:
- Not subject to Social Security and Medicare taxes until age 18
- Not subject to Federal Unemployment tax until age 21
- Possibly not subject to State Unemployment Tax or Workers' Compensation, depending on the state you live in
- Subject to income tax withholding, but first $5,450 of wages earned in 2008 by each child are nontaxable, assuming that the child has no other income
- Wages above $5,450 will incur federal income tax, but it will still likely be at a much lower tax rate than you would be
- Possibly taxable in your state and/or locality, so be sure to check this out
Even though the child's wages under $5,450 aren't taxable due to the standard deduction, you will still be required to report their wages either quarterly on Form 941 or yearly on Form 944. You will also have to prepare and file W-2's at year end as well.
One of the most beneficial aspects of hiring your children is that you can use whatever wages they make to pay for items that are not deemed to be necessities by the IRS and still be able to deduct your children as your dependents. For example, if your child wants to go on a school trip that costs $3,000, you can deposit their checks into an account for them and use it for this purpose. So, what would have been a nondeductible personal expense for you indirectly becomes a deductible business expense for the work that child performed.
A few things you should keep in mind, though. You should definitely keep good records to show what duties the child performed and preferably pay them by check. Another important tip is to pay your child a "reasonable wage" for the work they do. This is as simple as determining what you would have to pay for an adult to do the same job and possibly reduce it a bit, depending on the child's age. And believe it or not, the IRS has upheld paying child wages for kids as young as 7 years old!
On the personal side of all this, I definitely take advantage of these benefits with all three of my teenagers. My son (the only one with a license yet, bummer!) drops off and picks up files and delivers tax returns to my clients, goes to the bank and post office, buys office supplies, and is generally my courier, especially during the summer months. And both of my daughters have become quite good at entering invoices into Peachtree for some of my clients who need bookkeeping services done at times. And of course, there is always that dreaded filing that needs to be done.
If you stop to think about it, I am sure that you can find plenty of things for your kids to help you with.
You'll be teaching them responsibility and saving money at the same time! Now what could be better than that?
Julie L. Bohn - Helping Agents Reduce Their Taxes