Last week we talked about implementing an Educational Assistance Program in your small business to help pay for your child's college. If that tax-saving strategy wouldn't work for your business situation, there is another strategy small business owners can use to build their kid's college nest egg. However, this tax strategy will take some time to see real benefits, so if you have young ones - get to planning now!
Here's the Strategy
Hire your child to do legitimate work in your business, pay them an annual amount equal to the standard deduction (Currently, $5,950, approx $496 a month), then have them put their earnings into savings or an IRA. (We'll talk more about the IRA strategy in next week's "From Where I Sit").
What is considered legitimate work?
You could put your kid to work doing something as simple as filing or answering phones, office cleaning or landscaping. If you have a teenager who is into social media - what teenager isn't - you can hire them to take care of your social media marketing & website updating.
The IRS has no official minimum age requirement for parent's hiring their children so if you have a very young child, you could hire them as a "spokesperson" - basically pay your child a salary to use their image on marketing materials, etc.
Who does this benefit? My business, my child, or me?
All of the above! Your business will benefit with payroll deductions and if you operate as a proprietorship or partnership you will not have to pay payroll taxes if your child is under 18.
You will benefit personally by not paying your child an allowance - which would never be deductible. Instead you are paying them real earned wages and as mentioned above you will receive a deduction and/or avoid payroll tax, depending on how you have structured your business. You could also receive a "Get Out of Jail Free Card" with college tuition if you encourage your child to save or invest most of their wages.
Your child will benefit in many ways. First off, by working in your business, they are receiving real life experience in the 'business' world. Of course, it will not be as harsh as working for a big corporation, but they are sure to develop several life skills that they won't learn from household chores. For example, at an early age they will learn how to behave and interact in a business environment. You will also be starting them early on how to budget, save and/or invest their wages for the future - skills that will last a life time.
Another benefit to your child is they will not be paying any taxes on their earned income if you pay them amount an equal to the standard deduction. Plus, don't forget about that deduction!
My advice is to get creative with how you can put your kids to work. Just remember there are a few child labor laws that still apply even if it is an employer/parent relationship - so contact us before you decide to hire your child 17 or under!
As always, document everything and follow the same rules you would for a typical employee. Also, make it worth it for your child - I wouldn't suggest forcing them to invest every cent of their earned income. Let them have their play money too!