SelfInformed

October 2015


Hire Your Kid

Thursday, October 22, 2015


Q:  I saw one of your seminar videos and you talked about creating 
a job for my child.  How do I know if this works for me?

A:  First of all, thank you for viewing the on-line seminar and I hope you found many ways to save thousands in tax dollars including my favorite which is to Hire Your Kid.  If you operate a sole proprietorship and you have a child that can help in the business this idea is right for you.  Period!  Those are the only two factors that matter in putting you in position to reduce your overall tax liability by as much as $2,500.

The best part about this tax savings idea is that you are already spending this money anyway.  Rather than just giving your child money, create a job within your business so that the child can earn the money.  There are many intangible benefits for your child such as learning responsibility, gaining experience and knowledge, increased maturity and confidence which most likely outweigh the tax benefits but why not save taxes at the same time.

The technical process that makes this possible is effectively moving taxable income from your tax return onto the tax return of your child where income will be taxed at a much lower tax rate.  In fact, if your child earns less $6,300 in wages they will most likely pay no tax at all.  If they are under age 18 working in their parent’s sole proprietorship, there is no federal income tax, no social security tax, no FICA or Medicare tax, no state unemployment tax, no tax at all.  At the same time, the $6,300 paid in wages is fully deductible as a business expense right on your Schedule C.  If you are in the middle income tax bracket of 25%, that deduction will save approximately $1,575 in federal tax and another $945 in self-employment tax for a total savings of $2,520.   They are rare, but this tax savings idea truly is a “no brainer!”

A quick warning!  Don’t just pretend.  Don’t say your child has a job and then just include $6,000 on line 26 of your Schedule C and take the savings to the bank.  Actually put the child to work.  Create a job, including a job description, time cards, pay stubs, etc.  At the end of the year, do the paperwork.  File a Form 944 payroll tax return and prepare and submit a W-2 for your new employee.  Don’t take shortcuts.  The paperwork is not difficult but avoid the temptation to skip the work.  Maybe the best news is that for a couple of hundred dollars you can probably have someone do the work for you.  We even have a new benefit here at the NASE to do all the detailed paperwork for you.  Check out NASE's HireYourKid page to see how easy this can be.  Regardless of who does the paperwork for you, don’t let this idea slip away.

As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.

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