Hire Your Kids, Cut Your Taxes

Posted on: April 6th, 2010 by

Accountant - Kids Saving MoneyHiring your kids can actually help increase your family’s wealth by decreasing your income tax bill.  The keys to this being successful, however, is that your business must not be incorporated and you pay them reasonable wages.  That will allow you to deduct their wages from your income and shift the money to your children, who will be in a much lower tax bracket.

If your children are under 18, you will have to pay no Social Security or Medicare tax and, usually, no state unemployment or disability taxes either.  The courts have already rules that you can deduct taxes for any “reasonable wages” that you pay your children ages 7 and older to perform for your business.  The key is to show a profit objective though; as long as you can establish a profit objective, you don’t have to actually make a profit to claim the deductions.

Your CPA will strongly advise that you do everything in your power to substantiate every little deduction.  You may want to consider putting your kids on a time clock or writing down their times on a time sheet.  Pay them with a check.  They can always endorse the check over to you for cash.  And finally, make sure that you issue them W-2s at the end of the year.  This will provide them with a copy of what they have earned as well as a copy for the government.  If you need help with setting up any of this or questions concerning the appropriate hiring of your kids, please contact your local accountant.



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