Don’t Miss Finding Out How Hiring Your Children is Good for Your Wallet!
Its true!! CPAs can help you find those hidden deductions that you don’t normally think about. Let me give you an example of something most business owners don’t know.
Jessica is a salon owner and has two teenagers that are under 18. Jessica is tired of her children always asking for money, and feeling like an “ATM”. After a consultation with her trusted CPA, she decides to make her children work in her salon after school. She has them sweeping the floors, answering the phone, making appointments, washing and folding towels and anything else that needs to be done, and is within their capability. Not only is Jessica teaching her children the value of a hard-earned dollar, she is also making a wise business decision.
Jessica was going to give her children spending money anyway, but now, as her employees, she can deduct their wages on her taxes! It gets even better, since Jessica is the sole proprietor of her business, she doesn’t have to pay Social Security or Medicare taxes on her children’s wages. This applies to businesses where the parent is the sole proprietor, or the partnership is owned by both parents.
Here’s another little-known fact, if your children are under the age of 21, or you employ your spouse, you do not have to pay Federal Unemployment Tax on their wages.
You MUST withhold the Federal Income Tax and State Income Tax, but typically they will receive this as a refund when they file their taxes at the end of the year.
Just to make this perfectly clear, if the business is a corporation or the partnership only has one parent as an owner, the child’s wages are subject to all withholdings, just like they normally would for all other employees.
The IRS is not too lenient, when they find a business owner that just uses their children as a tax shelter, so be sure to do the following:
- Your children must provide services that are necessary and ordinary. They need to keep track of their time, and you should keep these documents should you ever be questioned about the time they were paid for.
- Their compensation must be reasonable, meaning that you can’t pay them $100/hour. The amount they make should be what you would pay a stranger to do the same tasks. Make sure you pay them with a check, so that there is a paper trail. Paying in cash will only cause you problems in the future.
- Make sure you have the same forms filled out for your children as you would any other employee. That means you need to keep on file, at a minimum, a Form W-4 and a Form I-9, and any other documents necessary for your particular state and industry.
Jessica’s children now have money that they earned through their own efforts, and are feeling a sense of pride and accomplishment. Jessica no longer needs to feel like the “ATM” and she is getting a break on taxes, which allows her to create a bigger profit in her salon. Depending on what other great decisions she makes, an expansion might be in her future!
Contact us at firstname.lastname@example.org or 407-988-5647 to find out if there are any other ways to fatten your wallet!
Categories: Tax Information