Hire Your Kids
If your small business is not incorporated, you can obtain a significant tax break if you hire your kids.
Hire Your Kids
Many people roll their eyes when this tax strategy is mentioned, but it is a legitimate method of lowering the taxable profit of your small business. In fact, this tax strategy isn't even considered particularly aggressive and does not raise your audit risk.
There are three key aspects that make this strategy work from a tax perspective. First, the wages that are paid to your kids are deductible from your income, thus reducing your tax liability. Second, you are not required to pay Social Security, Medicare, unemployment or disability taxes as you would with an adult employee. Finally, your kids will either pay no taxes or nominal taxes at a much lower rate than yourself.
There are a few things you must realize before you rush off to hire your kids:
- Your kids must be between the ages of 7 and 18;
- You must have a legitimate business and the kids must actually work;
- You must document the wages and time the kids work;
- You must pay them "reasonable wages";
- You must actually pay your kids, preferably documented with a check;
- You must issue a W-2 to each child at the end of the year.
You should give careful consideration to the total amount you will be paying your kids. The standard deduction for 2004 is $4,850. If you had two kids working for you and paid each this amount, you would reduce your taxable profit by $9,700. Your kids would each be required to file a tax return, but would not have to pay taxes since the standard deduction would cover the income amount.
Potential Downside
You may have already realized the potential downside to this strategy to hire your kids. Each of your kids now has $4,850 in their hot little hands. While this money should be put aside for college or contributed to another useful purpose, you cannot force your kids to take such steps. While a stern parental glance may suffice on household issues, there is no legal method for recovering the wages if you discover your child intends to get a tattoo.