Business Owners Can Hire their Children to Lower their Tax Liabilities
Summer is coming! If you have not taken advantage of the tax benefit of hiring your kids because you want them to focus on their school activities, why not change 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 assignments during the summer. You could have them on the 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. This is known as 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 $13,800.00 this year, the whole amount is tax free to your child because it is below the standard deduction ($13,850.00 for tax year2023). Your child would get any federal tax paid refunded, and you get $13,800.00 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. Imagine the tax savings if you hire two or more children.
However, you must be aware 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 relevant 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 the legal requirements for employers. You should complete the same procedures that are required when you hire a person not related to you. It advised that you have a good payroll company or Human resources representative.
Paul is the sole shareholder of his S Corporation. For the past 4 years, he was not on the payroll of his S Corporation. Consequently, he missed some huge tax deductions. Two years ago, after a tax consultation in our office, he decided that he was going to run his business differently. He followed our advice, and he did the followings:
1. He determined a reasonable salary for himself and his 18-year-old son, who is in college.
2. He gave him a job description.
3. He agreed to sign a contract for payroll service.
4. He signed a contract for accounting or bookkeeping services, and he committed to a monthly meeting. Your type of business might require only a quarterly meeting.
Always remember that proper tax planning is key to reduce tax liability. A quarterly review of your business activities is recommended to avoid surprises during tax filing.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
We offer FREE initial consultation!!!