HOW TO (OR HOW NOT TO) PAY YOUR CHILDREN

29 Aug HOW TO (OR HOW NOT TO) PAY YOUR CHILDREN

Posted at 12:20h in News by

By Brandy Swope

A tax-savings strategy our firm has recommended over the years is paying children for working in their family business.

Benefits include:

  • Deduction for the parent who is typically in a higher tax bracket than the child.
  • Income to the child whose wages could be just under the standard deduction amount of $6,300 making it federal tax-free to the child. State tax would have to be paid but it would generally be around $250 – $300.
  • If the wages are paid to a child under 18 and the parent is a self-employed business owner, they are not subject to any payroll taxes (FICA, federal unemployment, or state unemployment).
  • Wages to the child would qualify them to make a regular or Roth IRA contribution. This is a great way to begin saving for college in a tax-deductible way.

With the benefits come responsibilities. These include:

  • Be sure to document the hours worked. Using some type of time card would be ideal.
  • Be reasonable in hourly rate. Do not attempt to pay your child more than you would to an outside third party.
  • If you are going to pay a “bonus” at year-end, be sure to have documentation that says why and how this is calculated.
  • Keep good records of the actual work performed.

In most cases, this is a win-win for the parent(s) and the child(ren).