As most of my readers know I have had many different business ventures over the years. I did work a Corporate job from 2008 – 2017, but other than that, I have been self employed most of my adult life. I believe that I continue to get smarter as I’ve gotten older, and I know more that I did in the past. I recently learned a new strategy that I wish I had known years ago.
I have 4-kids. My oldest is almost 14-years old. He does administrative work for me and one of my businesses would write a check to him for his work. My other kids will from time to time, but none as regularly as him.
I recently made my oldest an actual part time employee, giving him a paycheck (I am actually direct depositing it in his account). The company that I am paying him from is a LLC taxed as a partnership (using IRS form 1065), owed by my wife and I, his parents. A provision of the 2017 tax bill (“the Tax Cuts and Jobs Act”) increased the Standard Deduction all the way unto $12,200 (in 2019). This means that I can pay my children employed in the family business $12,200 in income and they will have a 0% tax rate!
Ideally this means that I will divert income from a higher tax bracket into their lower (I.E. 0%) tax bracket. And it will be a business deduction.
Another great benefit is that when both parents are the only owners of the partnership they are not required to pay employment tax on their minor children working for the business.
Since my child(ren) now has documented earned income (due to W2) he qualifies to open a Roth IRA. We are doing direct deposit, putting 45% of his pay check into his brand newly opened Roth IRA and 55% into his checking account. He is then paying a 10% tithe to our Church and then keeping the balance of the 45% as spending money.
A Roth IRA, for those unfamiliar, is money put away for retirement using after tax dollars. The money grows tax free and at retirement (59 1/2 or later) the money and any growth can be pulled out, tax free. There are actually 2 other provisions in the tax law where the growth in an IRA can be pulled out tax free. To pay for schooling (college) and for the downpayment on a first house. Parents who are in a position to do so tend to try to help their children pay for college and to help them buy their first house. However these parents are doing it with after tax dollars.
By putting the kids on payroll, they are able to do this using before tax dollars. The wages paid must be at a reasonable wage for work they actually do. I’d advise you to document the work your kids do, who they do it for, and the amount they are being paid.
For more in depth reading of these topics:
- https://www.kitces.com/blog/tax-rules-hiring-children-family-business-flsa-tax-savings-standard-deduction-roth-contribution/
- https://www.nerdwallet.com/blog/investing/why-your-kid-needs-a-roth-ira/
- https://www.forbes.com/sites/garrettgunderson/2016/02/20/see-the-irss-incredibly-generous-tax-benefits-for-hiring-your-own-child-part-two/?fbclid=IwAR3z4bzEprV0Np_826KBp21D3pmn0dVA8w-9AkebrxAjwSqFvq0PrTJY4IA#49f641f07243
