Minimize Your Family's Taxes
Five Tips to Minimize Your Family's Taxes
Parents: Did you know that if you own your own business you can reduce your taxes by hiring your family members?
Most people are aware that they can hire their spouses, but you can also hire your children in your business (within limitations).
There are tax benefits to both hiring your spouse and hiring your children, but this lens will focus on the tax benefits from hiring your children.
If you own your own business, one of the greatest tax saving strategies you have available to you is the ability to hire your children. Here are a few ways that hiring your kids can save you in taxes:
Save Taxes By Hiring Your Kids
1. The wages you pay your children are tax deductible. Any monies paid to your children for legitimate work in your business is a business expense, and thus a tax deduction to you.
2. By paying your children, you are effectively transferring income from your higher tax bracket to your childrens' lower tax bracket. This is a great way to reduce your family's total tax liability.
3. Business expenses, including wages paid to your children, reduce your self employment income. By reducing your business income, you reduce both your self employment tax and your income tax.
4. Your kids may not owe any tax on the amount you pay them, depending on how much they earn and whether you claim them as a dependent or not (in 2009, dependent children can earn up to $5,450 before they will owe any income tax)
5. Paying your children a wage allows them to open an IRA or Roth IRA, which gives them a jump start on saving for retirement, college and other goals.
Got Entrepreneurial Kids: Hire Them!
If you have entrepreneurial kids, consider starting the business in your name and hiring your children instead of having the kids own the business. This will reduce your family's overall tax burden.
Why would it matter who owns the business? Well, if you are self employed, you have to pay self employment tax on your net earning over $400. This rule applies to both adults and children, so there is no advantage to being a kid when you're self employed.
However, kids have a huge advantage if they earn wages paid from an employer. Why? Well, kids don't have to pay taxes on the first $5,450 of earned income, even if they are claimed as a dependent on their parents' tax return.
Kids Making Money: Business Ideas for Kids
How do kids make money when they're not old enough to get a job?
Actually, the number of ways for kids to earn money has grown tremendously with the growth of the Internet, but some of the old fashioned ways still work as well. Here are some old fashioned, but still great ways your kids can earn money:
Mowing lawns, shoveling snow, raking leaves - it's much cheaper to hire a kid than an expensive lawn service, so this method of earning money will always be around
Dog walking, and pet sitting - we live in such a busy society that our pets get left at home for long time periods, so this is a great way for kids to earn extra money and for Fido to get the exercise and companionship he needs
Continue reading 'Kids Making Money'...
Here's An Example:
Let's assume Teddy, how is 14 years old, has a web design business. In 2009, he expects to earn $5,000 from this business after all of his expenses.
As the owner and a self employed business person, Teddy will have to pay 15.3% in self employment taxes on this income. Assuming this is his only income, he won't owe any federal income tax because his total earnings are less than the standard deduction amount ($5,700 in 2009), but he will still have to pay self employment tax on the net profit. Teddy's total tax in this example will be $765.
Now let's assume that Teddy's dad is the owner of the business and he hires Teddy to do the work. Teddy still earns $5,000, but he is his dad's employee instead of being self employed, therefore he doesn't have to pay self employment tax. Teddy's dad will report the $5,000 in income on his tax return, but he gets to deduct the $5,000 he pays Teddy to work in the business, so dad won't owe any tax on this income. Also, because Teddy is under 18 and works in his father's business, Teddy's dad doesn't have to pay payroll taxes on him. Finally, because Teddy earned less than the standard deduction, his total tax liability will be zero.
In this example, the family's total tax savings by having the business in the father's name and having the child as an employee instead of the owner is $765.
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Children And Taxes
For most kids, the last thing they are thinking about when they get a job or start a business is whether they will need to file a tax return or owe taxes on the income they earn.
Most kids won't even make enough to file, but some children will be required to file a return based on the amount and type of income they earn.
The rules for children and taxes can sometimes be different than those for adults, so how do you know if your child is required to report their income?
Continue reading 'Children and Taxes: Is Your Child Required To File a Tax Return?'
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Any tax advice contained in this message is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. It is strongly recommended that you get additional help from a (paid) tax professional who is familiar with your unique circumstances. In other words, don't take take advice from a Squidoo lens, or forum, or blog...