IF you run your own business, consider employing your children this summer vacation.
Employing your children gives you a triple benefit:
1. It teaches your children the virtue of work and the value of money.
2. It could save you taxes by shifting income down from your rate of about 33 percent to 39 percent for federal (about 9 percent to 12 percent for state) down to the children’s rate of zero to about 10 percent or 15 percent for federal (about 0 percent to 2 percent for state – depending on your tax bracket.
3. It saves American Opportunity and Lifetime education credit that would otherwise be lost if you, as parents, earn above certain prescribed income limits (phased out).
Bear in mind that a child who earned about $10,150 in wages in 2014 pays no income taxes because of the child’s estimated standard deduction of $6,200 and personal exemption of $3,950. If your child contributes another $5,500 for IRA, your child can earn as much as $15,650 without paying any income tax. While you are on a roll, add another $2,000 to $5,000 for education benefits. That brings the total income of your child to about $17,650 to $20,650 without paying a dime in income taxes. Think about the possibilities if you use this concept for two or more kids. This is called Tax Planning.
It therefore makes sense to employ your children this summer and have them use their paychecks for paying tuition fees and purchasing books and school supplies. You convert non-deductible expenses (tuition fees) to deductible expenses (wages).
Keep in mind that tasks assigned to your children should be appropriate for their ages. Such tasks include answering telephones, inputting computer data, taking messages, making errands, stuffing envelopes, sending out promotional literature, dropping and picking up mail at the post office, office filing, cleaning and gardening of business premises, and other chores. It is imperative to keep contemporaneous and accurate records of the work performed and wages paid. Time cards or timesheets can help you defend the wages in case the IRS or EDD comes calling. Note that there is no minimum age requirement for your children to have IRA accounts.
Here are some bonus tax tips for sole proprietors:
1. You do not have to withhold or pay FICA (Social Security tax) for your children under age 18. This saves about than 15 percent of their gross wages.
2. You also don’t have to pay FUTA (unemployment tax) for children under 21.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies. The firm celebrates its 38th anniversary in 2015.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in 704 Mira Monte Place, Pasadena, CA 91101. He has 50 years of experience in accounting, consulting, and tax work.
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The Firm proudly welcomes Arlene Al-os in 2015. She obtained her bachelors of Science in Accountancy from Mindanao State University and MBA from Ateneo de Manila University. She teaches intermediate accounting at UCLA and was a professor of Economics at Asia Pacific College. She has over 15 years of experience including member firms of KPMG and BDO Seidman accounting firms.
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Our readers may call (626) 744-0200 or email tax questions to [email protected]. Please visit our website for about 300 tax tips at www.victorsycpa.com.
