As your tax preparer certainly knows, the average American pays around $10,489 annually on taxes (roughly, 14% of their household income). Why succumb to this alarming tax statistic, when you can be proactive and hire your children to work in the family business, while teaching them valuable lessons? According to tax laws, teenagers beginning at the age of 13, are legally allowed to work for their parents or within family business, so long as the jobs are not deemed hazardous. How can you benefit from this? Employ your children in your business, so that they and you may benefit from tax advantages, while simultaneously relieving your workload. While your tax preparer can tell you specific details for your business and situations, let’s go over a few general guidelines and benefits.
This form of employment is so beneficial, it’s hard to refuse. When your child is hired as a legitimate employee for your business, their wages will be excluded from your Medicare, Social Security, and federal unemployment taxes. Concerned with your child’s busy schedule on top of school, sports, and friends? Not a problem. Full time, part time, or whatever-time-is-available for you or your child, are all valid options. Your son or daughter can benefit from savings up to $12,000 of wages from your business this year. This means that your child can save up to as much as double their income compared to previous years due to the increased standard deduction. Not only are you saving money on your child’s expenses, but you also receive the business tax deduction for your employee’s salary. This deduction lessens your federal income tax bill, and your self-employment and state income taxes, if applicable. By making one easy change in your business, you save money and time, and expand your family business. Your kid will be able to gain job experience, a steady income for basic teenage needs, and save towards college, a car, or whatever they please, without taking unearned money from your wallet.
This brings to mind the insightful quote, “A fine is a tax for doing something wrong. A tax is a fine for doing something right.” -Anonymous
Make sure your taxes are lessened because you’re doing something right. By engaging your children in business and financial commodities, you make the smart choice, a profitable choice. In doing so, be sure to keep in mind certain standards to hiring your children, as follows:
“(1) Your child must be an authentic employee, meaning that their work must pertain, and contribute to your business and payments must go towards these tasks, (2) Reasonable compensation; of course, the more you pay your child, the more you benefit, however their wages must be reasonable and similar to other workers in the same occupational category, and lastly, (3) Alignment with employer laws; this pertains to legal documentation such IRS Form W-4 and USCIS Form I-9 and such, which applies to any employee, not just teenage employees.”
Each of these requirements is in line with everything you would have to manage in hiring any employee. So, by completing these, you are not taking on any more work than you would otherwise absorb. Let’s say, for example, you have your 13-year old son files documents, scans images and cleans-up/organizes the office on the weekend, and earns $7000 for the year. Your child should receive a W-2, with the wages fully deductible offering tax savings to you as the owner, whilst the income tax to the child is $0, since the wages are offset by a child standard deduction. Add-in potential self-employment tax and even more savings may come into play. This method of savings has the aspect of duality that both you and your son or daughter will find quite valuable in the long run. A new mindset like this can be the difference between owing taxes each year and saving thousands of dollars. Work smarter and save smarter. In the wise words of Kin Hubbard, “The safest way to double your money is to fold it over and put it in your back pocket.” Ask your friendly neighborhood tax preparer how you can fold over your money and pad your back pocket today.
Valderas Financial Solutions LLC