Hire Your Kid and reduce your taxable income by $12,000
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Creating a job for your child can be a rewarding experience for both you and the child. A job can promote maturity, understanding, a sense of pride and self worth. However, creating this new job will do one thing for sure, and that is save you thousands of dollars in taxes.
That's why we are here! Your first thought to the Hire Your Kid Tool Kit most likely is that it is too good to be true. Create a job, do the paperwork, file the tax returns, report the wages, and you will pay thousands less in taxes on April 15th. The best news is that we will do all the work. You pay the kid and we will do the rest.
The Question:
How much money do you give to your child each year? Not just the money you give them as an allowance, but what about that college savings account and clothes? What about band trips and choir trips and gas for the car? The answer is a lot!!! But for now let's assume that number is $12,000 per year. College savings alone should be more than that, but let's just be conservative.
That $12,000 per year is a personal expense and is therefore never deductible on your federal or state income tax return. But if you are a small business owner operating as a sole proprietor, you have an option. An option that can save you more than $4,000 per year in federal and state income tax, simply by Hiring Your Kid!!!
The Plan:
If you give your child money each year and you own a small business filing a Schedule C; you have come to the right place.
Instead of just giving the kid the money, whether for college or for Saturday night, create a job for them. Put the kid to work. Develop a job description, determine a reasonable wage, make them sign a time card, pay them twice a month. At the end of the year, prepare a W-2 and file payroll tax returns with the IRS and the Social Security Administration.
Why??? By creating a job, you have now converted $12,000 of personal non-deductible expenses into fully deductible business expenses. Remember, this is the same money that you were giving to the kid anyway. But now, the cash flow is more formal. It is based on a job. A real job. You have effectively moved taxable money from your tax return onto the child's tax return.
The child who is under age 18 can earn up to $12,000 in wages and incur absolutely no tax. No federal income tax, no state tax, no FICA or Medicare, no FUTA or SUTA. No taxes at all. The child doesn't even have to file a tax return since they are under the minimum earned income for filing requirements. However, you, the small business owner, now have $12,000 in wages that are fully deductible right on your Schedule C, on Line 26, Wages. $12,000 that used to be personal, non-deductible allowance money is now fully deductible wages!!!
Is there a minimum age?
The only requirement is that the services provided by the child are 'reasonable' in connection with their age and skill set and that the wages are also 'reasonable' in connection with the services provided.
What about DOL rules?
The Department of Labor, as well as State Labor organizations set standards for minimum ages, minimum wages, hours that can be work each day and each week, all designed to protect children from abusive labor practices. Rules vary from industry to industry and from state to state. However, children working in a business owned by their parents in a non-hazardous capacity are EXEMPT from any Fair Labor Standards Act provisions related to Child Labor Rules.
Is there a maximum age?
There is no maximum age for employment and the only requirement continues to be a 'reasonable' standard for the services provided. Keep in mind that the concept that makes this such a tremendous benefit is that taxable income is being moved from YOUR tax return onto the CHILD's tax return. If the marginal tax bracket of a 40 year old child is substantially less than your marginal tax bracket AND you are giving the child money anyway, then creating a job is a tremendous idea and will save you literally thousands in taxes.