Jun 25, 2012

She's Leaving Home: Paying Your Child A Salary

She...(we never thought of ourselves)
Is leaving (never a thought for ourselves)
Home (we struggled hard all our lives to get by)
She's leaving home, after living alone, for so many years

Our kids will leave us one day. Why not get some additional tax deductions before they leave!

Did you know there are tax advantages associated with hiring your children? Salaries paid to your children under 18 are not subject to the social security tax, or FUTA (up to age 21) when employed in a parent's sole proprietorship. Fringe benefits are also available to the child. It's very important to remember wages must be reasonable and you have to prove your child actually worked. For example, don't say your 3-year old lifted inventory in your factory!

Think twice about giving your children allowance and consider the advantages of giving them a paycheck:
1. It enables you to take advantage of the child's full standard deduction
2. It enables you to reduce adjusted gross income, thereby preserving personal exemptions and itemized deductions
3. It enables your child to make contributions to an IRA

4. It enables the child to receive money that is not subject to the kiddie tax
As employees, your children can participate in a qualified retirement plan and any of the company's other fringe benefits, such as:

• Group-term insurance
• Accident and health insurance
• Educational assistance
• Travel and entertainment


RES said...

I would like to say that your post is wonderful. We can learn many things from it. You have done a good work. Thanks for posting.

Jamaal Solomon, EA said...

Thanks for the kind words! I really appreciate it!