The Plan.
To start it is pretty simple, put your kid to work and pay them. You are likely already making your kid "work" for the money you give them. Whether that is household chores, good grades, or just being an upstanding citizen of the community. Instead of just giving your kid the money, create an actual job and put them to work. Develop a job description, determine a reasonable wage (lets still assume $6,000 per year), make them sign a time card, and then pay them. At the end of the year, prepare a W-2 and file payroll tax returns with the IRS and the Social Security Administration.
And how did that save me money?
By creating a job in your company, you have now converted $6,000 of personal non-deductible expenses into a FULLY DEDUCTIBLE business expense. Remember this is the same money that you were giving your kid anyway. But now the cash flow has been formalized. It is based on a job. A real job. You have effectively converted those personal expenses into business expenses and moved taxable income from your tax return onto your child's tax return.
Welcome to the real world kid, time to pay your taxes. Or Not???
But wait, I just shifted my tax burden to my kid? Parent of the year nomination. Remember our $6,000 per year assumption that we picked out of thin air. Well, we got pretty lucky, because a child who is under the age of 18 can earn up to $6,350 in 2017 ($12,000 under the new 2018 Tax Plan) in wages and incur absolutely no tax. That is right! No federal income tax, no state tax, no FICA or Medicare, no FUTA or SUTA. No taxes at all. Better yet, the child doesn't even have to file a tax return since they are under the minimum earned income threshold for filing requirements.
I love it when a good plan comes together.
You, the small business owner, now have $6,000 in wages that are fully deductible right on your Schedule C, on Line 26, Wages.
Depending on your tax bracket this could save $2,000 or more in taxes per year, every year, per kid!
Depending on your tax bracket this could save $2,000 or more in taxes per year, every year, per kid!
The Requirements.
If you give your child money
and
You own a small business filing a Schedule C
To maximize the savings of this plan it is best if your child is under 18 and you're a sole proprietor or single-member LLC, or a spousal partnership or LLC. The HireYourKid Toolkit is based on these requirements, if your scenario is different there still may be tax savings by hiring your kid. Please contact us for more information.