How would you like to help your children develop a sense of responsibility and strong work ethic, while simultaneously letting them earn some money and save for college, all tax-free?
It’s possible. Kids fill our lives with joy, but they also fill our lives with tax benefits. Every child you claim as a dependent can lower your taxable income by $3,950. And the Child Tax Credit may save you another $1,000 per qualifying child if your income is less than $110,000/year.
But those tax benefits apply to all parents. There’s another way to lower your family’s taxes that only applies to business owners: hire your children to work for you.
As long as they’re doing legitimate work for your business, you can hire your child and pay them up to $6,300 per year tax-free. If they stay under this limit, they usually don’t even have to file a tax return. And you get to deduct their wages, which lowers your business’ taxable income.
For sole proprietorships and LLCs taxed as a partnership, you even get to avoid the payroll tax.
Using this strategy, you’ve effectively moved income from your high tax rate--or your business’ high tax rate--to your child’s tax rate, which is zero. And you’ve kept the money in the family.
(Disclaimer: I’m not a CPA and this should not be considered tax advice, please consult a professional.)
I’m using this strategy right now with my two boys. As I’m writing a finance book for kids, I’ve hired them to read it and give me feedback.
I’ve had clients who were dentists pay their kids to model for photographs to be used on their website or brochure.
And many business owners hire their kids for janitorial duty.
There are countless jobs kids can do for you, and you can pay them at the same rate that you’d pay any other employee. Here are some ideas:
- Cleaning the office
- Washing company cars
- Updating or cleaning databases
- Data-entry
- Transcribing video or audio
- Making trips to the post office
- Weeding or mowing the lawn at your business
- Helping at live events by passing out handouts and making sure the room is picked-up
- Walking door to door and leaving fliers for your business
- Updating your social media accounts
The options are limitless, but to avoid IRS scrutiny, make sure it’s a job that’s age appropriate and your child can do sufficiently.
If your kids are like my kids, they are going to love getting their hands on some spending money. But you’re their parent, so it’s smart to make sure that the money isn’t all spent on videogames and mobile apps.
My kids put most of their money in a college savings account, which helps to teach them the value of saving. You could do the same, or even help them start what I call a Wealth Capture account, which is a savings account where money is put aside to invest or start a business one day.
Use this strategy wisely, and you’ll give your children a valuable head start on life.
