Kohler offers this benefit breakdown:
First, small business owners who employ their minor children don't have to withhold any payroll taxes.
Second, all single wage earners, including children, don't pay taxes on the first $5,800 in 2011 in income because this is the standard deduction. Entrepreneurs with children on the payroll can still claim them on their tax return as a dependent and take the exemption, including the child tax credit.
"The beauty is—kids don't pay taxes on their earned income on the first $5,800!" Kohler exclaims.
In turn, the business benefits too. Kohler explains, "When you pay your children for services they perform in your business you are able to generate a valid business expense while pushing income to your children."
In addition to tax deductions gained, parents are surprised at the ancillary benefits such as being able to spend more time with their children and creating love for entrepreneurship.
For those ready to put their children on payroll, here are a few tips:
Create Legitimate Duties
"When brainstorming ideas for hiring children, make sure the jobs you give them are legitimate. It doesn't have to be an important role, but directly related to the purpose of the business," says Kohler.
Possible jobs include keeping the books; cleaning the office and maintaining the property; working on the company website; and the like.
Keep a record of what the kids did and a time record in order to withstand an audit.
Follow the Right Procedure
The IRS allows any sole proprietorship or partnership (LLC) wholly owned by a child's parents to pay wages to children under age 18 without having to withhold the payroll taxes. However, those operating an S or a C-Corporation do not receive this benefit.
The recommendation is to pay children out of a family management company paid a management fee from the Corporation, or out of a Sole-Proprietorship or LLC with independent income and operations.
Mark J. Kohler is the author of What Your CPA Isn't Telling You and Lawyers are Liars. He is a partner in the accounting firm Kohler & Eyre CPAS, LLP and the law firm Kyler, Kohler, Ostermiller, & Sorensen, LLP, where he specializes in the areas of business, estate and tax planning. www.markjkohler.com .
3 Keys to Hiring Your Children in Your Small Business
For this tax-saving strategy to work, however, you must be careful to follow to the following guidelines:
1. The child must actually perform the work for which he/she is paid.
If your child is old enough (and responsible enough) to do chores around the house, then he/she is probably old enough to work for your business. If they help clean the house you live in, they can clean the office building you work in. They can vacuum the carpets, empty the trash cans, dust the furniture, and make those restroom fixtures shine!
Can they read and write? Then they can do many clerical office tasks such as filing and basic record keeping. Can they use a computer? Here’s an area where they may know more than you do. So put your computer whiz to work and have him maintain your website.
If your business provides labor services such as lawn care, and your children are big enough and strong enough, put them on the crew. I’m sure you can think of plenty of other tasks. Be creative, within the limits of reasonableness.
The key here is this: the child must be paid for actual work. No funny money, ok?
2. The compensation must be reasonable.
Again, you are hiring your child and treating him/her like any other employee. This must be a true arm’s length transaction. You pay the child the fair market value for services rendered. Do not inflate the wage. Pay your child the same hourly rate as you do other employees who are doing comparable work. If you hire the child to do work that no other employee is doing, find out what the current rate is for that type of work in your geographical area. Again, no monkey business here.
3. The work done by the child must be necessary for the business. In other words, if your child did not do the work for which they were paid, the business would have had to hire someone else to do it.
These guidelines are merely common sense, aren’t they? Simply put, your child must be treated like any other bona fide employee.
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