Cut Taxes By Hiring Your Kids
When you employ children who are at least 7 years old in your business, their
salary is a deductible business expense. For this reason, hiring your kids for your business
is better than assigning them chores around the house. You must
pay reasonable wages for actual work done. They can clean your properties,
file papers, answer phones, and do just about anything that relates to your
business. Their salary stays in your family, and your children will pay
low taxes on it.
Children under 18 normally don't have to pay any Social Security taxes on
their wages, unless they are working for an incorporated business.
In legal terms, your children's wages are considered "earned income,"
which means that the first $4,300 received by each child in 2001 is tax-free.
They can earn another $2,000 tax-free if they put it into a Roth IRA. This
is a good way to assure a comfortable retirement for your kids,
because that money can earn interest and grow to over
a million dollars by the time they retire.
Your kids will learn how to earn money and work responsibly,
while your business gets a
tax deduction. You can pay their salary into an account which can be
used for college. Or, since you have an effective "power of attorney"
over their finances, you can have them use that money to help you buy a
minority share in some business or real-estate property... perhaps a
real-estate property that the whole family can enjoy!
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Cut Taxes By Hiring Your Kids 
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Time to complete:
| 3 hours to read the regulations, file W-4 form(s) and get started. |
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Money you'll spend:
| A kid's salary, perhaps $4300 per year |
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What you'll get:
| $1204 per child, if you pay each one $4300, and you're in the 28% bracket. |
Step-by-step instructions:
- Familiarize yourself with Federal child labor laws.
- You should file a form W-4 for each kid. You don't have to withhold income tax
if the child owned no income tax last year, expects to owe none this year, and has no taxable
investment income.
- In the daily course of your business, whenever you notice tasks that kids
can do, make a note of them.
- Encourage your kids to think of work to do for your business. If
your kids are good with computers, they might be
very helpful there. You could pay them to scout out opportunities for
promoting your business on the Internet.
- When the kids work, keep a record of their hours of work, and how much you
paid them for it.
- At the end of the work year, file a form W-2 with the IRS for each kid.
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Further Reading:
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