November 16, 2022
How do you make your children a tax deduction? We all know that kids cost a lot of money, but there is one way where they can help you save some money, and that is by using the tax strategy to hire your child to work in your business. If your child is age seven or older, you can add them as an employee in your business. If your child is age seven through 18, you can probably employ them through your business and reap some tax benefits. Let’s talk about sole proprietorships and partnerships.
These business entities offer the best benefit for employing children, and you can pay your child up to the standard deduction allowable, which is currently $12,950 each for services performed in the business. You will give them a w2, but they won’t have to pay any Social Security or Medicare taxes, and your child will not have any income taxes as well, assuming they have no other sources of income.
If you’d like to go one step further, you can also add $6,000 to that. Make it a total of $18,950 and allow your child to fully fund $6,000 into a traditional IRA that will bring their taxable income back down to 12,950 with no tax consequences. The $6,000 can grow for college purposes or retirement for your child. Remember that this was a traditional IRA, not a Roth IRA.
The magic of compounding dollars can help that money really grow while your child is still young. If you have an S Corp or a C Corp, you can also utilize this strategy, but you will have to pay Social Security and Medicare taxes, the social security and Medicare taxes amount to 15.3%, so if the parent’s tax rate is higher than that, it still makes good sense. If you, as the parent pay in the 30% range in taxes, you could still save 15%.
The maximum that you can pay them is still the same, the standard deduction limit or $12,950 currently without having income tax consequences. This again assumes the child has no other source of income. If you have a child who is getting ready to go off to college, you may want to review how this affects your application for financial aid.
It may have some consequences for juniors or seniors in high school, but this can be a wonderful tax strategy to implement to help you save money once your child reaches the age of 18. They’re probably done with this strategy, but that is where you’ll need to look at your specific tax situation.
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Donna Bordeaux, CPA with Campground Accounting
What happens when you send two CPA’s out into the relaxing outdoors to camp? You get CampgroundAccounting.com. Donna and Chad have over 50 years of combined experience as entrepreneurial CPA’s. They’ve owned businesses and helped business owners exceed their wildest dreams. They camp and travel across the country every chance they get, so it’s just a natural fit that they focus their CPA skills on helping campground owners throughout the USA grow their businesses and minimize the impact of taxes. They understand the key performance indicators and specialized issues that face RV park owners every day.