View Full Version : Tax Tip #2 - Hire the kids too...

07-11-2001, 11:28 PM
Here's another...

If you operate a sole proprietorship or husband-wife partnership, think about hiring your kids (provided they're under the age of 18). This has several advantages. For starters, it keeps them out of the mall. But it can also cut the tax bite on your family income. After all, you're probably already shelling out a fair amount to your kids for spending money — why not have them work for it? Additionally, this deduction reduces your self-employment tax.

It's a pretty good deal for your kids, too (although, you might have a hard time convincing them of that). If your company is a sole-proprietorship, you pay no Social Security, Medicare or federal unemployment taxes and each child can shelter up to $4,400 of wage income with his or her own standard deduction. So you get a tax break, and there's zero tax liability for your kids.

To illustrate, let's say your marginal tax rate is 36%. You can legitimately stiff Uncle Sam out of $576 by paying your two teenage kids $800 each (say 100 hours at $8 an hour) for helping out during the holiday rush. This doesn't even count the additional self-employment tax savings (2.9% or 15.3% of the wages depending on your income level). Kids actually saving you money? What a concept!

If you run your business as a corporation, you can still hire the kids and deduct the wages on the company tax return. However, in this case, the payments are subject to Social Security, Medicare and federal unemployment taxes just like wages paid to regular workers.

If this idea seems worthwhile, don't abuse it. Wages paid to your children must be reasonable in relation to the job. Paying $20 an hour to a seven-year-old to sweep the floors isn't going to fly with IRS auditors. Bill Bischoff - Smartmoney.com

07-12-2001, 01:48 AM
I know you can save on federal tax that way, but i am under the assumption that med and fica tax is paid on the first $62,500 .