Do you pay your children allowance in exchange for work (business work, not household work!), if so, this tax saving technique is perfect with you.

Say if you hire your kid for work and pay them $5,000 annually on payroll (really pay them instead of owing them!), you can deduct this as payroll expense and reduce the taxable income by $5,000 which may save you $1,500 assuming you are in 30 percent tax bracket.

This $1,500 is not necessarily subject to income tax to your kid if this is his or her only income. The taxable income is zero after the standard deduction.

Tax deductible to your business but it is tax free to the kid, is it too good to be truth?

The best is not yet to come, the kid may not need to pay any social security and Medicare on the payroll of your business is sole proprietorship.

When you pay your kid, the payroll can be further deposited to a Roth IRA which is tax deferred. The earning distributing is tax free if such distribution is  taken out to the extent less than the qualified higher education.

With all these good benefits, you may be curious about how to implement. I am writing this article to walk you through!

Minimim age requirement:

By case law, it is 7 years old if the work is not hazardous and the kid is hired by parent’s business. However, please consult with your labor law attorney to confirm if your State conforms this.

Substantiation

The most important paperwork is the paystubs , W2, employment contracts , documentation about the fair market value of the pay rate and timesheet. Also, although you kid may not owe tax, but the tax return of showing the taxable income is required.

Don’t owe the kids any money, they have to be added to your payroll working like a regular employee.

One time Project vs Regular Work

The nature of the work should be recurring, regular clerical work. If this is just one time project such as website development etc, it may be disallowed to be classified as regular employment work. Consult with your attorney to determine if the nature of work can be classified as employment.

2 Comments

  1. Paul Lam

    So the kid is still on regular payroll but no tax withhold, what about EDD tax, also no withhold?
    Thanks

    • Sam Kan

      The kids’ paychecks are still subject to withholding. However, if they don’t owe tax when they file tax returns, they will get a refund. It also applies to State.

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