Two birds, one stone : Make your kids millionaires AND reduce your tax burden, all with one decision.
Small business owners have the ability to pay a salary to their minor children. The salary is an expense for the business and therefore decreases your taxable income.
PUT YOUR KIDS ON PAYROLL
Not only will your child be earning money but they’ll be learning work ethic, responsibility and get a taste of entrepreneurship. The money your child earns should be paid to an account in their name. If they earn less than $12,000 per year, they will need to file a tax return but will not need to pay federal income tax. However, they will be receiving a W2, which makes them eligible to contribute to an IRA.
If your child invests his earnings, it could make them a millionaire at retirement. In our blog What It Takes to Make Your Kids Millionaires we ran two scenarios. By investing $15,000 at age 9 and not touching it, the account could have around $1.8M at 65 years old, assuming an average annual return of 9%.
DECREASE YOUR TAXABLE INCOME
The wage paid to your minor is an expense for your small business meaning it decreases the amount of income that Uncle Sam can tax. If you have two kids that earn $12,000 per year, it will reduce your taxable income by $24,000. A win-win for your family and business.
WHAT’S THE CATCH
No catch that I have found. Obviously, the IRS has provided specific rules around this. To name a few:
- Your kid actually has to work. Keep a log of his hours and what service he is providing. The IRS is not going to believe that your 8-year-old is a delivery driver for your company. They have provided a list of accepted tasks in the link below. Here are some ideas for child jobs and you can pay them the same rate you would pay any other employee:
- Cleaning the office
- Washing company cars
- Data entry / updating customer lists
- Transcribing
- Updating social media accounts
- Your business must be and file as a sole proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse. Check with your accountant to be sure this fits your particular situation.
ADAMS INVESTING TAKEAWAY
Finding a win-win scenario while dealing with taxes is unusual to say the least. If your company can pay your child, instead of hiring an employee, I say do it. Not only does it help your child financially down the road but they will be gaining great lessons in entrepreneurship, work ethic and responsibility.
You work hard for your money, is it working hard for you?
The writer of this blog is not a registered investment advisor or broker/dealer and does not make security recommendations nor provide financial advice. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult their personal tax and/or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.