When we talk about tax planning for the end of the year, this might be a good time to do the opposite of what we normally suggest and pull income into the current year, rather than trying to defer it to next year. A great way to do this is by hiring family members in your business, which you can still do before the end of the year.
What are the advantages of hiring family members and putting them on payroll?
- Move income into a lower tax bracket
- Family member can contribute to a retirement plan (IRA)
- Funds can be used to pay for expenses or school
We talked about tax brackets last week.
- Yes we talked about the different tax brackets from 0% to 37 (which may become 39.6%)
- Works well for parents in a higher bracket (37%)
- Child paid $5,000, $10,000 or up to around $12,000 (0%)
- Depending on the type of business, family member may need to pay Social Security and Medicare taxes, but the family could save $2,000 for every $10,000 of salary.
Then you mentioned retirement plans?
- This works well for spouses. You can pay your spouse $5k, $10k or even $20k.
- Then depending on the type of retirement plan, this income can get contributed to a retirement plan.
- Works the same way we talked about with children before – it allows for that income to be tax free for federal and state – all you need to do is pay Social Security and Medicare.
- Once again, the tax savings could be $2k for each $10k contributed to retirement plans.
For a child, they can make a Roth IRA contribution, right?
- Makes it even better.
- As long as they have earned income
- No tax deduction – but not needed
- Grows tax free.
- Can take contributions out to pay for anything – including college
Speaking of school, can the business pay for a child’s education?
- Yes, but it is very complicated and the circumstances have to be just right.
- What I would do is to hire your child and set the funds aside to pay for college.
- Takes a little planning, but can be done.
Lastly, can a child be paid any amount?
- Yes, but the wages have to be justified for the amount of work that they do.
- Can’t pay them to do nothing.
- Get a work permit if required.
- Keep a timesheet
- Have an accurate job description
Be sure to talk to a tax professional if you have any questions about hiring family members for your business or would like further assistance.