Let Your Children Make Money For You:

During the year we advised business owners to take advantage of the tax benefits available to them by allowing their children to work.  Here, we would like to review a few possible tax saving ideas with you.

Shifting the burden: Family income taxes can be reduced by shifting some of the business earnings to children as wages for services performed by the child. The work done by the child must be legitimate and should correspond to the child's age and ability. Compensation to the child should be reasonable based upon the duties performed, and a W-2 should be issued to the child at the end of the year.  Thus, a business deduction to the business and earned income to the child.

A child can earn income in 2009 equal to $5,700 by using his or her standard deduction to completely shelter the earnings. The dependent exemption would normally stay with the parent (each human only gets one dependency exemption).  But by shifting this amount of income from parent to child, the parent +/- 30% tax bracket  can save income taxes of over $2,500 (including state taxes), without any tax burden to the child.

IRAs could magnify savings: The parents in a family business could also save additional taxes by keeping the child on the payroll for a longer period and paying him or her an additional $5,000. This could then be sheltered from additional tax liability to the child by making tax-deductible contribution to the child's own IRA.  Currently, IRA money can be withdrawn without penalties if used for higher education.

Even if ALL the child's earnings can't be sheltered by the standard deduction or an IRA deduction, the result is still a positive one for the parents as the child is usually in a lower tax bracket of 10% as compared to the parent's higher bracket.

FICA tax savings:  In addition to the income tax savings mentioned above, a parent running an unincorporated business can also save self-employment tax by shifting some of his or her earnings to the children. Employment for FICA and FUTA tax purposes doesn't include service performed by a child under the age of 18 in the employ of his mother or father in a unincorporated business.

(714) 731-2700