As an owner of a business, hiring your children to work for you can reduce your family's combined earnings, the amount of taxable compensation, or both. This is true whether your business is a corporation, partnership, or sole proprietorship. When you employ your children in the enterprise, it allows you to use their income, and the costs of their profit-sharing plans as tax deductions. Also, some employee benefits are tax-exempt to family members.
Helpful benefits - now and later
Let's say you have a baby daughter, Laura. If Dina, your wife, is employed in your company, the cost of paying for child care while she holds the job could be reduced by the allowable child care tax credit. Also, you could set up a qualified retirement plan to help in paying for your spouse's retirement, and possibly help fund your daughter's retirement. It's always best to start saving early.
Profit-sharing plan contributions that are made by the company are basically tax deductible. But, there are some stipulations that are imposed by the IRS. So let's say that your child is a teenager who is good at bookkeeping. If you compensate her according to the going rate for a bookkeeper, and keep a record of his or her hours, your child's salary can be reported as a business cost.
If your family member's total salary does not go over the standard deduction ($6,100 in 2013), their salary is effectively tax free. Also, income that exceeds that amount is taxed at the family member's marginal tax bracket, which is presumably lower. You should be aware that there are certain regulations that can apply to income from investments that may be taxed at the parent's rate. If you hire a child younger than 18, their compensation is exempt from Social Security tax, as long as your firm is not incorporated.
IRAs can be a suitable choice
Investing in an Individual Retirement Account (IRA) is a good option if your firm does not presently offer a qualified retirement plan. The biggest benefits of IRAs are tax-deferral of income, and possible tax deductible contributions (depending on the type of IRA). For staff members under 50, contributions are limited to $5,500 (2013 figure) and subject to specific income limits. Payouts distributed before 59 and a half may involve a 10% federal income tax penalty, as well as the normal taxes on personal earnings. However, there may be some exceptions to this.
Health benefits
Family members who are employed by your business may be entitled to additional benefits your company offers. Accident and health coverage, group term life policies, and disability insurance are a few examples. The normal fees for offering these plans are also considered deductible expenses for your family.
You should realize that workers who are family must essentially perform as an worker, and get paid a salary not over the normal rate for the kind of work performed. Furthermore, be aware that the tax specifics of any retirement account (there are a number of types), are controlled by statutes that apply to both entrepreneurs and employees. So, there are clear advantages to having your children as employees.
Helpful benefits - now and later
Let's say you have a baby daughter, Laura. If Dina, your wife, is employed in your company, the cost of paying for child care while she holds the job could be reduced by the allowable child care tax credit. Also, you could set up a qualified retirement plan to help in paying for your spouse's retirement, and possibly help fund your daughter's retirement. It's always best to start saving early.
Profit-sharing plan contributions that are made by the company are basically tax deductible. But, there are some stipulations that are imposed by the IRS. So let's say that your child is a teenager who is good at bookkeeping. If you compensate her according to the going rate for a bookkeeper, and keep a record of his or her hours, your child's salary can be reported as a business cost.
If your family member's total salary does not go over the standard deduction ($6,100 in 2013), their salary is effectively tax free. Also, income that exceeds that amount is taxed at the family member's marginal tax bracket, which is presumably lower. You should be aware that there are certain regulations that can apply to income from investments that may be taxed at the parent's rate. If you hire a child younger than 18, their compensation is exempt from Social Security tax, as long as your firm is not incorporated.
IRAs can be a suitable choice
Investing in an Individual Retirement Account (IRA) is a good option if your firm does not presently offer a qualified retirement plan. The biggest benefits of IRAs are tax-deferral of income, and possible tax deductible contributions (depending on the type of IRA). For staff members under 50, contributions are limited to $5,500 (2013 figure) and subject to specific income limits. Payouts distributed before 59 and a half may involve a 10% federal income tax penalty, as well as the normal taxes on personal earnings. However, there may be some exceptions to this.
Health benefits
Family members who are employed by your business may be entitled to additional benefits your company offers. Accident and health coverage, group term life policies, and disability insurance are a few examples. The normal fees for offering these plans are also considered deductible expenses for your family.
You should realize that workers who are family must essentially perform as an worker, and get paid a salary not over the normal rate for the kind of work performed. Furthermore, be aware that the tax specifics of any retirement account (there are a number of types), are controlled by statutes that apply to both entrepreneurs and employees. So, there are clear advantages to having your children as employees.
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