Reducing Your Tax Bill as an Entrepreneur by Employing Your Children
As an entrepreneur, you're always looking for ways to save money and reduce your tax burden. One effective strategy is to hire your children as employees in your business. Not only can this help you save on taxes, but it can also be a great way to teach your kids about the value of hard work and responsibility.
Tax Benefits of Hiring Your Children
Hiring your children as employees has several advantages when it comes to reducing your tax bill. First, you can deduct their salaries as a bona-fide business expense. For tax year 2022, the threshold for paying taxes on earned income is $12,950 for individuals under the age of 18 ($13,850 for tax year 2023). This means that if you pay your children a yearly salary of $12,950 or less, they won't have to pay taxes on their earnings. Additionally, you can claim a tax deduction for the salaries that you pay to your children as a business expense.
Building a Financial Future with a ROTH IRA
Another way to maximize the benefits of hiring your children as employees is by contributing to a ROTH IRA on their behalf. The maximum contribution for tax year 2022 is $6,000 ($6,500 for tax year 2023). By contributing the maximum amount to a ROTH IRA during their early years, you can help your children build a solid foundation for their financial future. For example, contributing $6,000 to a ROTH IRA for just five years during their youth can have the potential to grow to over $2 million at the time of their retirement, which can be withdrawn tax-free.
Business Structures and Tax Implications
It's important to note that different business structures have specific tax rules and regulations that you'll need to consider when hiring your children as employees. For example, businesses that are known as pass-through entities, such as sole proprietorships single member LLC’s and partnerships [not corporations including S-corporations] may also be eligible for tax breaks and may not have to pay FICA taxes [Social Security and Medicare] on the salaries paid to their children. Furthermore, these entities are not responsible for Federal unemployment (FUTA) taxes on children under 21. Such businesses, however, may still owe state unemployment taxes.
Things to Consider When Hiring Your Children
Here are a few things to keep in mind if you're considering employing your children in your business:
Make sure your children are old enough to be legally employed. In most states, the minimum age for employment is 14, although there are some exceptions for younger children who work in certain occupations or on a farm.
Pay your children a fair wage for the work they do. This not only helps to reduce your tax bill, but it also helps to ensure that your children are properly compensated for their time and effort.
Keep accurate records of your children's employment. This includes tracking their hours worked and the tasks they performed, as well as keeping a record of their pay.
Overall, employing your children in your business can be a great way to save on taxes and teach your kids about the value of hard work. Before implementing this strategy, it's important to consult with a tax professional or refer to the IRS guidelines to determine the compliance implications for you and your business.
At Benzer Capital, we can help you structure your business, set up a ROTH IRA, and ensure proper compliance with respect to employment for businesses and individuals. CLICK HERE or CALL US to schedule a complementary tax review and second opinion conversation for you and your business.