Have you heard of the Kiddie Tax? Before 1986, wealthy taxpayers shifted some of their wealth to their children to take advantage of their lower tax bracket. The Kiddie Tax, which was a part of the Tax Reform Act of 1986, put an end to that tax-avoidance loophole.
While the Kiddie Tax prevents parents from gifting their children indiscriminate sums of money for no reason other than tax avoidance, it doesn’t stop them from employing their children for legitimate reasons.
Hiring your children to work for your company is what many people would consider a win-win scenario. It teaches them about responsibility and work ethic. In return, you may reap tax benefits. However, the IRS is always suspicious of wages paid to children. Here are a few tips to hire your children the right way.
- Do actual work. Whether you hire your tech-savvy son to help revamp the company website, or your high-energy daughter to wash company vans, the work your children do must be necessary and helpful for your business.
- Pay actual wages. You must pay your children real wages. Do not pay them in services or meals you plan to later deduct as business expenses. Also, do not pay them in cash. Instead, create a paper trail in case the wages ever come into question.
- Pay reasonable wages. Payments to your children must be reasonable in relation to the work done. Don’t pay your son $10,000 for the new website when the average pay for web design is only $5,000.
- Know the tax implications. Taxes are different when you hire your children than when you hire other employees. And there are different rules for different business structures. For example, if your company is set up as an S or a C corporation, you may also want to create a family management company for tax-saving purposes.
With summer quickly approaching, I know many entrepreneurs with high school and college-aged kids are considering putting their kids to work. Employing children can help them learn the value of money and divert high-tax income. Let the tax professionals at Boris Benic and Associates help you do it the right way; call us for a consultation before you begin.