Small Businesses:
Having Your Children Work for Your Business:
Before you start paying your children to work at your business there are some questions that need answered.
Do you pay your children allowances (or some equivalent)? If so, how much? Are you saving for their college (or requiring them to save)? What's your highest marginal tax rate? i.e. if you are a C-Corp, what is the corp's tax rate, if S-Corp, or LLC-- what is your personal marginal rate(highest rate)?
Your children do not have to file a dependent tax return unless they have earned income more than $5,700, or unearned income greater $950. They are exempt from withholding (for federal income taxes) if they earn more than $950.
One easy way to plan for your children's education is to employ them, and force them to save the money for college. This is fully deductible as wages for the company, and unless your child makes more than $5,700 in earned income for 2009 (unearned income, such as investment income, is much less, so you have to be careful there), they do not have to file an income tax return. You are exempt from FICA withholding, if they are under 18 yrs old and you're a sole proprietor. You are not exempt if you are a Corp or S-Corp, and a Partnership or LLC is only exempt if you and your spouse are the only owners (ouch!). There is a way you can do it if you have a C-Corp or S-Corp and you are actually a sole proprietor, you just have to create a smllc, and pay them through it -- not too tough.
I'm interested, you say, but how do I work this voodoo? I know if I pay my kids, they'll blow it all on pizza, music & video games.
You pay your kids as you would any other employee, but you have a payroll deduction to the savings account (say a Coverdell ESA). These are after tax deductions (up to $2000/yr), but there is no tax paid on appreciation (much like a Roth). So out of the $5700 have 2,000 directed to their Coverdell. You can increase their effective income by another $5000 as well, if you want to start planning their retirement (401k). As long as their W-2 doesn't say more than $5,700, they do not have to file (unless they have unearned income).
We all give our kids allowances, or some equivalent. This is just a way to make it work for them. Instead of giving them $50/week and asking them to save $25 for college -- why not pay them $60, deduct $20 for their Coverdell, and $20 for a Roth. Your out of pocket would be $60, but your child would be saving for college, retirement and you would increase your payroll deduction by $3120 (saved yourself ~ $7-800 in income tax) for money that you were already handing out or saving.
Having Your Children Work for Your Business:
Before you start paying your children to work at your business there are some questions that need answered.
Do you pay your children allowances (or some equivalent)? If so, how much? Are you saving for their college (or requiring them to save)? What's your highest marginal tax rate? i.e. if you are a C-Corp, what is the corp's tax rate, if S-Corp, or LLC-- what is your personal marginal rate(highest rate)?
Your children do not have to file a dependent tax return unless they have earned income more than $5,700, or unearned income greater $950. They are exempt from withholding (for federal income taxes) if they earn more than $950.
One easy way to plan for your children's education is to employ them, and force them to save the money for college. This is fully deductible as wages for the company, and unless your child makes more than $5,700 in earned income for 2009 (unearned income, such as investment income, is much less, so you have to be careful there), they do not have to file an income tax return. You are exempt from FICA withholding, if they are under 18 yrs old and you're a sole proprietor. You are not exempt if you are a Corp or S-Corp, and a Partnership or LLC is only exempt if you and your spouse are the only owners (ouch!). There is a way you can do it if you have a C-Corp or S-Corp and you are actually a sole proprietor, you just have to create a smllc, and pay them through it -- not too tough.
I'm interested, you say, but how do I work this voodoo? I know if I pay my kids, they'll blow it all on pizza, music & video games.
You pay your kids as you would any other employee, but you have a payroll deduction to the savings account (say a Coverdell ESA). These are after tax deductions (up to $2000/yr), but there is no tax paid on appreciation (much like a Roth). So out of the $5700 have 2,000 directed to their Coverdell. You can increase their effective income by another $5000 as well, if you want to start planning their retirement (401k). As long as their W-2 doesn't say more than $5,700, they do not have to file (unless they have unearned income).
We all give our kids allowances, or some equivalent. This is just a way to make it work for them. Instead of giving them $50/week and asking them to save $25 for college -- why not pay them $60, deduct $20 for their Coverdell, and $20 for a Roth. Your out of pocket would be $60, but your child would be saving for college, retirement and you would increase your payroll deduction by $3120 (saved yourself ~ $7-800 in income tax) for money that you were already handing out or saving.
To maximize, let's say you pay them 2k for their Coverdell, and the remainder for their Roth (less what you were going to give them for an allowance). If they are 10, and they save 2k a year for college, and put 3700 a year for a roth -- every year until college -- retire at 66, you just gave them $2 million to retire with (8% annual yield) tax free, assuming they don't put in another dime, and about 5k/year for four years of college. If they are 5 now, it's ~ 3.6 million for retirement, and 10k a year for school (all tax free).
There are limitations to this. You want to pay your children for work they actually perform. It has to be something they can easily do. The IRS or Department of Labor can (and will) look into this if you are paying them, and you should be able to verify their work with timecards, or some other form of verification. You also have to be aware of labor laws. If they are a toddler, there is not much they can do, legally, is there? There is one easy way around both issues -- pay them for "modeling"
Models/actors are exempt from certain child labor laws (hence some TV families have infants and toddlers). If you put your children on your business card, all business advertisements, tv ads, etc -- you can hire them to be models for your advertisements, and on a regular basis, take more pictures, video, etc.
send me an e-mail, or give me a call and I can help you structure your labor so it works for you.
-Al W. Middleton, CPA
(208)724-3762
