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 around 27 percent by shifting income down from a maximum rate of 35 percent for federal and 9 percent for state, down to the children’s rate of zero to about 15 percent for federal and zero to about 2 percent for state, depending on your tax bracket.
3. It saves about $1,500 of Hope or $2,000 of 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 $9,750 in wages in 2012 pays no income taxes because of the child’s estimated standard deduction of $5,950 and personal exemption of $3,800. If your child contributes another $5,000 for IRA, your child can earn as much as $14,750 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 $16,750 to $19,750 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 more than 15percent of their gross wages.
2. You also don’t have to pay FUTA (unemployment tax) for children under 21.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.