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Too Early to Start Thinking About Taxes
I hope 2018 was a great year for you and your business and that your expectations for 2019 are even better. Most of you haven’t even begun to think about taxes for 2018, but I wanted to start the year asking you to think about taxes for 2019. I know, I know, who cares about a tax return that isn’t due until April of 2020 but I will put my money where my mouth is. You may have heard me say that almost all tax savings ideas, the really good ones, end as the New Year comes in. Most great ideas have to be considered and implemented before the end of the year and before you actually start filling out any of those silly IRS tax forms. I want to help you save up to $5,000 in taxes for 2019 just by reading this idea and then saying, “Yes”!
The new tax law that took effect beginning in 2018 made significant changes to the amount of the standard deduction. The standard deduction is basically the amount that we can all earn tax free before having to file a tax return. The new tax law changed that number from about $6,500 all the way up to $12,000. That means that if you have a summer job and make $12,000 and that is your total earnings for the year, then you will pay no tax. You don’t even have to file a tax return.
The point of this tax savings idea is that the $12,000 tax free earnings level applies to all single taxpayers…including your kids! That’s right…each of your kids can earn up to $12,000 tax free. So where can they get a job to earn that much money?? If you are a self-employed business owner with a kid at home, ages 7 to 17, its time to put them to work. Create a job! Instead of just paying for their clothes and activities and savings accounts out of your personal household budget use the money that they earn as an employee of your business.
But it even gets better….
The wages you pay your child, the $12,000 that is tax free to the kid, is fully deductible on your business tax return reducing your taxable income for federal income tax and for self-employment tax. If you are in one of the middle tax brackets at 22% or 24% that would mean about $2,700 in lower federal tax and another $1,800 in lower self-employment tax. A savings of about $4,500 for money that you are already giving the kid anyway in a different form. And if your state has a state income tax, the savings are even higher.
As I talk to small business owner all across the country and talk about the benefits of creating a job for kids, I always get that same concern….”This is too good to be true! Is this legal? Does this create a red flag for the IRS?”
Let me answer that with two simple links, one from the IRS itself and one from the Small Business Administration…
www.irs.gov/businesses/small-businesses-self-employed/family-help
www.sba.gov/blogs/5-reasons-hire-your-child
In fact, if you type “Hire Your Kid” in your favorite internet search engine you will find links from the IRS, from the SBA, from Forbes Magazine, and even from the NASE promoting the benefits of hiring your child.
This is truly a tax planning no brainer. If you are self-employed and have a kid at home aged 17 or under, there is absolutely no reason not to create a job for your kid. The catch is that you can’t wait until the end of the year. You can’t wait until tax time and just take a random $12,000 deduction. You have to act. You don’t need anyone to do this for you, but you just need to do it. If you need help, use that search engine and find the help you need. Or even better, contact the NASE through your favorite expert and we will help get you started. There is about $4,500 lying on the floor waiting for you to pick it up. Now is the time! Don’t let this get away for another year.