Paying Your Children and Reducing Your Taxes
Introduction
There are lots of reasons why you should pay your children when they work. Here are some of the top reasons to get started today.
No Need to Withhold
If the child is under sixteen, you likely won’t have to withhold payroll taxes. Be sure to file quarterly payroll taxes, but other than that, the paperwork should be fairly simple. If you have turned your small biz into an S Corp or C Corp, you will have to pay Social Security and Medicare taxes, so be aware of the intricacies and paperwork involved.
Paperwork and Covering Your Bases
You’ll want to be sure that things are above board in case the IRS decides to double check on the wages you’re paying out. Here are the things you’ll need to keep record of:
- The work your child(ren) performed.
- The wages paid and why these are fair market value wages.
- Try to keep the wages steady. Instead of paying all the wages in the last quarter, spread them out for the entire year.
- Pay by check or in a way that can be tracked in case it is ever questioned.
- File a W-2 for each child at the end of the year.
Your Child Files at a Lower Rate
Your child will file a tax form for the wages he has earned at a much lower rate than what you would pay. Try to keep his wages to $5000.00 or less. For example, you might pay as much as 40 percent or $2000.00 on that amount, while your child likely won’t owe any taxes or very few.
Other Advantages of Adding Your Children to Payroll
- Your family business becomes a truly family endeavor and the children have a vested interest in the business continuing to do well.
- Children learn to work for their money and invest wisely by watching your actions.
- Your children will likely do a better job for you than an outsider, since you can train him or her to do the job to your standards and satisfaction from a young age.
- Your child won’t have to look for a job outside the home or spend money driving to and from a job.
Unless you are willing to keep up with the necessary paperwork involved in paying your children, it may not be a good idea to give wages to them. The last thing you want is an IRS audit when you don’t have the appropriate paperwork to show that the money has gone toward wages and other items. There are many other deductions you can take within this article series. There is no need to take deductions that seem too complicated or difficult to keep up with. It’s perfectly fine to pick and choose. If you do keep up with the paperwork, this is one way to save money on taxes that will also benefit your children.
This post is part of the series: How Home Offices and Self-Employed Can Save Even More on Taxes
Tips for little-known tax breaks you might be overlooking. Consult with your accountant or a tax professional to be sure you are meeting your state’s tax codes and any recently updated federal codes. These articles will give you a starting point and hopefully save you a bundle in the process.
