In these 5 minutes, Jeff Dvorachek, a tax partner, explores the various ways hiring a child; or spouse can maximize the tax savings of a family-owned business.
Hiring your spouse and children in your business can provide a lot of tax benefits. But there are more than just tax benefits to doing this.
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
Let’s start by talking about moving the income into a lower tax bracket.
- As most people know there are eight different tax brackets ranging from 0% to 37% (which may become 39.6%)
- So hiring your child works well for parents in a higher bracket (32-35-37%)
- Let’s say that you pay your child $5,000, $10,000 or up to around $12,000, their tax bracket is 0%.
- Depending on the type of business, family member may need to pay Social Security and Medicare taxes, but the family could save $2,100 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 since as long as they have earned income, they can contribute to a Roth IRA
- 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 one of our professionals if you have any questions regarding hiring family members.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
