Save on Taxes by hiring your kids

From a tax relief savings standpoint, It's a very good idea to employ your kids with in your company. If you own your business and have children between the ages of seven and seventeen, you could use child tax relief deduction laws to get the most out of employing your kids. If you paid them up to $5,000 last year, they probably avoided having to pay any additional taxes. Believe it or not, paying your kids to work for you in your business can boost your wealth by lowering what you pay in taxes. This break is available only if you operate as a sole proprietor or as a partnership in which you and your spouse are the only partners. If your business runs as a corporation, then it, not you are considered the employer and the corporation is not relieved of the tax relief liabilities. So long as you can establish a profit objective, you don't have to actually make a profit to claim the deductions. The standard tax relief deduction for most kids is $5,000. Because of this, children are exempt from having to pay taxes on the first $5,000 they earn. Taking advantage of child tax relief reduction you can pay your child up to this amount and basically use it tax-free! Because the amount is typically deducted from your business, you just saved money. The main tax relief benefit is to allow business owners to shift income out of the corporation to the child, who can probably shelter that income from tax entirely.

Child Employment Savings

Let’s say you are in a 30% tax bracket. Your business makes $75,000 in net income. You want to spend $5,000 on one of the kids. If you take that amount out of the business and spend it, you will pay $1,500 in taxes, leaving only $3,500 to spend. Instead, you hire your child. Each child has a $5,000 standard tax relief deduction – meaning that they do not pay federal income taxes on the first $5,000 in income. So you pay the child $5,000. Your business deducts that amount. The child uses the standard tax relief deduction to shelter the income. Result: You save $1,500 in taxes!

Taxes Due on Child Wages

If your child is under 18 years old AND you pay them out of a sole proprietorship, partnership or most LLC’s they are not subject to Social Security or Medicare taxes and, normally, no state unemployment or disability taxes, either. That means your child is not responsible for paying FICA taxes on his or her wages, nor are you required to pay the employer's share of these taxes. If you pay them out of a corporation or an LLC treated as a corporation, then they will owe social security taxes.

Keeping Accurate Records

You will have to file a Form 941 (Employer’s Quarterly Federal Tax Return) four times per year. That’s the form that the IRS uses to get employers to withhold income and social security taxes. For a child, it’s easy – there will be no withholding, so you'll end up entering lots of zeroes on the form. In addition, you need to issue them a W-2 (Wage and Tax Statement) at the end of the year. However, this small amount of paperwork can add up to some serious tax relief savings. You will also need to track the child’s hours and activities to prove that they did the work and that the type of work was within their capacity. A consistently updated spreadsheet or notebook will work well for this. Keep in mind that the Tax Court has permitted parents to employ children as young as 7 years old as long as the work and pay were reasonable. Obviously, the older the child, the more they can do. The pay should be a bit less than what you would pay a third party. It's also important to draw up a job description for the work your kids perform and make sure what they are doing is necessary for the business. Pay the children with a check. Along with time sheets, keep canceled checks or pay stubs. To determine what a reasonable sum is, figure out what you are paying other people in your company doing the same job.

Tax Pitfalls to Avoid

A few more things you need to do to take full advantage of the child tax relief deduction include carefully monitoring the amounts spent by your child from their wages and on what. Make sure that the children do not account for more than 49% of their upkeep. If they pay for 50% or more of their total expenses, you will lose them as an itemized tax relief deduction on your personal return (Meaning you’d lose at least $3,000 in deductions AND the $1,000 child tax credit – ouch!). Using bookkeeping software can help you track kids’ total expenses (including housing and food) to make sure that you do not cross the 50% line

Start the Habit of Saving

The money your child earns should go into a bank account or other saving strategies. It is a great idea to have your child contribute to a Roth IRA. Not only have you gotten a nice tax deduction from the salary and trained your youngster to save, you've also help establish a nest egg for his or her future. The next $3,200 could be sheltered by setting up Roth IRAs for each child. the money invested in a Roth IRA is sheltered from federal taxes through the standard tax relief deduction ($5,000). In essence, children who have earned income are contributing money they haven't paid federal taxes on, the funds are allowed to grow tax-free, and they can be withdrawn free of federal taxes. There aren't many tax relief benefits as good as this one. Nothing here in any way questionable. Given that you have appropriate documentation and substantiation for your tax relief deduction, the only issue the IRS can raise is the "reasonableness" of the compensation. Keep good records and don't try to pay a 14-year-old child $50,000 a year just to file your papers once a week, and it's an easy win. This is just one of the tax relief saving strategies that Pathfinder Business Strategies uses to save business owners and individuals thousands of dollars in taxes. Sign up for a free tax strategy session to find out the tax relief deductions available to you and stop overpaying your taxes