The kids are home for the summer, sleeping past noon, and asking you for some extra spending cash. Instead of just giving them the money, why not put your children to work in your business? This is one of the oldest tax savings strategies that can benefit the family as a whole.
You are not required to withhold or remit payroll taxes for your children under the age of 18 when operating as a sole proprietor, a mom and dad partnership, or one parent owned single member limited liability company (SMLLC). These taxes include Federal and State Unemployment taxes as well as Social Security and Medicare taxes. It is important to note, if you pay your child out of a corporation, then you are subject to withholding payroll taxes.
Shifting income from parents to children usually results in tax savings. In 2016, a child can earn up to $6,300 of tax free income. In addition, you as the parent will still be able to claim your child as a dependent on your own return. The child can remain your dependent as long as he or she is under the age of 19 or under the age of 24 if a full time student.
You need to provide your children with legitimate jobs and fair compensation. If the IRS questions the payment, real records and time cards must be produced. If the IRS feels that the work performed is not reasonable, they will disallow the arrangement. Do not pay your children for doing chores. Pay your children for real services that they provide to your business.
Now that your child has earned income, kick start their retirement account by opening a Roth IRA. For the 2016 tax year those eligible can contribute up to the lessor of $5,500 or compensation for the year. An advantage here is they will start saving for their future and their money will grow tax free from an early age. In addition, their Roth contributions can be withdrawn at any time to use for expenses like college.
This tax saving strategy will not only save you tax dollars, but it can be a great way to teach your kids work ethic and the value of money. Don’t let your kids waste their summer at home, give them the opportunity to work and earn their money, start a retirement account, and save yourself tax dollars.