When it comes to taxes, small business owners are typically faced with a significantly higher tax burden than their employees.
Because businesses must match Medicare and social security contributions that are paid by employees.
The amount of taxes that small business owners are required to pay will depend, in part to the number of employees on their payroll. One way to benefit from significant tax savings is by hiring family members.
However, to take advantage of these opportunities, you'll need to ensure you have a professional CPA firm that specializes in working with small businesses because not all deductions are available to every situation.
But don’t let that detour you!
Be sure to explore your options as you can potentially save on your payroll and family income taxes by hiring your family, including your minor children.
Further, you might also be eligible to convert high-taxed income into low-taxed or tax-free income. It doesn’t stop there as you can achieve social security savings and start your child’s retirement plan contributions a few years in advance.
How do you convert high-taxed income into low-taxed or tax-free income?
If your child is under 18 years of age, moving your income to the child by paying them a wage is a common way to accomplish this.
This goes without saying, the work done by the child needs be legitimate, and the salary needs to be appropriate for the job.
In other words, if your child is being paid to do a job, they need to be doing it, and be paid a wage that would generally be accepted as appropriate for the position.
If your child is 18 or a full-time student, you still may be able to qualify for a tax break. This gets a little more complicated, so you may want to talk to your accountant to get the details on what will and won't work.
What about income tax withholding?
Like other employees, you'll most likely be legally required to withhold federal income tax on your children's wages. But if they didn’t have a federal income liability the previous year, and don’t expect to have one this year, they might be able to claim an exempt status.
However, once again, this can get a little complicated, so talk with your accountant before going forward with this strategy.
What about retirement?
It's possible that you could potentially start contributing to your child’s retirement.
You guessed it, work with your accountant to determine what retirement program and employee status would qualify.
What about my spouse?
If your spouse is working for the family business, you'll pay taxes like he or she’s a regular employee; that means withholding Medicare and Social Security taxes.
Taxes can often seem complicated and paying them can be a heavy financial burden. So employing your child can be a great way to save tax dollars while helping your child gain some gain work & life experience.
As we mentioned, it's important to you consult your accountant before you start employing your children. By doing so, you can have a clear understanding of what the tax implications are.
If you’re interested in learning more, schedule a free consultation with Cook Martin Poulson by clicking the button below.