You can hire your children to lower your tax liabilities.
If you have not taken the advantage of the tax benefit of hiring your kids because you want them to focus on their school activities, why not changing your focus to get a huge tax saving and give your children an early start in the workforce? You could give them less work during the school year and increase their assignment during the summer. You could also have them on payroll just for the summer. The main goal is to minimize your tax liability.
Hiring your children to work in your business has always been a great tax planning strategy- shifting income to your children. The latest changes in the tax laws make it even better because of the doubling of the standard deduction. As an example, if you paid your child $12,000 in 2020, the whole amount is tax free to your child because it is below the standard deduction ($12,400). Your child would get any federal tax paid refunded, and you get $12,000 business expense deduction. If you paid them more than the standard deduction, they would pay the tax at a lower tax bracket than you would.
Be mindful that the IRS is looking for taxpayers who did not follow the rules:
Rule 1: Your child must be a real employee. The work must be ordinary and necessary for your business, and the pay must be for services actually performed. The service must be appropriate for your business. Any real work for your business can qualify. The IRS has accepted that a seven-year-old child may be an employee, but that might not be the case for a younger child. It also depends on the State employment laws and the type of work or service.
Rule 2: The compensation must be reasonable. It is advantageous for tax savings purposes to pay your child as much as possible. However, it must be in line with the standard pay in the industry for comparable work in the geographic area.
Rule 3: You must comply with all of the legal requirements for employers. You should complete the same procedures that are required when you hire a person not related to you.
Annette case.
Annette the sole shareholder of a S Corporation. For the past 6 years, she was not on the payroll of her S Corporation. Consequently, she missed some huge tax deductions. Two years ago, after a tax consultation in our office, she decided that she was going to run her business differently. She followed our advice, and she did the followings:
1. She determined a reasonable salary for herself and her 18 years old daughter, who is in college.
2. She gave her a job description.
3. She agreed to sign a contract for payroll service, and
4. She signed a contract for accounting services, and she committed to a monthly meeting.
The result.
For 2019 and 2020 tax years, Annette benefited a huge tax saving. She had over $12,000 tax free in 2019, and $10,000 in 2020, the salary she paid to her daughter, as a business expense. The daughter received a tax refund of about $800.00 and $ 900.00, the taxes withheld from her paychecks. Annette had her own salary deducted as business expenses. She reported less net business income on her K-1 form. In addition, she benefited a tax deduction from QBI (Qualified Business Income) and she received a Paycheck Protection loan (PPP) as a result of the pandemic.
Do you know that you could reduce your tax liability by proper tax planning strategy as individual or business owner?
We offer FREE initial consultation!!!
Recent Comments