As a small business owner, hiring children to work for the company can be an excellent way to teach them about business and instill in them work ethic. Hiring your child can also be an effective tax saving strategy.
Children can earn up to $5,950 (in 2012) before owing income taxes and because you are getting a business deduction for the wages paid to them, this is income that you won’t have to pay any taxes on either. In most cases, your children will be in a lower tax bracket than you, so by paying them a wage you are shifting the income from your higher tax bracket to their lower tax bracket.
You can also open an IRA in your child’s name to shelter even more money from income taxes. If the child is under 21 years old, you do not have to pay unemployment tax. If they’re under 18 years old, you won’t have to pay social security or medicare taxes either.
Here’s an example:
Let’s assume you own a LLC, are in the 28% tax bracket and pay your 16-year-old son/daughter $5,000 over the course of a year. You would receive a business deduction for the wages you paid your child, saving you $1,400 (28% of $5,000). This would also reduce the amount of taxable income that is subject to self-employment tax, by $665 (13.3% of $5,000). That’s a total tax savings of $2,065!
Call Trustway to learn more about this and other tax saving strategies at (205) 451-1945.