Attention parents! How would you like to write off an extra $12,000 a year or more from your business’s taxable income? Today, you are going to learn how to hire your kids and take advantage of a little known tax benefit for small business owners.
First, let me say that I first discovered the benefits of hiring your kids a few months ago. I immediately started asking business owners I knew if they partook in this benefit.
Only a small percentage of them even knew this was possible! Those that did know it was possible to hire your kids told me that they absolutely took advantage of this little known tax benefit.
I knew I had to learn everything I could about this and share this information with others. My goal is to inform you of this benefit, how to learn more, and how to take use this to your advantage.
Why you should hire your kids
When you hire your kids, you save money
You read that right. You see, most parents make money and then buy things for their child with after-tax money. As a business owner, you have the opportunity to turn purchases for your child into business expenses.
What further explanation? Here’s an example:
Uneducated/normal family:
John and Jane own a salon and made $100,000 last year. After they paid their taxes, they took home about $80,000.
John and Jane also have a 13-year-old son, Adam. They give Adam $600 a year in allowance. They also pay $200 a month for Adam’s sports fees and about $5,000 a year on other items like “hip” clothes, football games, a cell phone, etc. These expenses come to $8,000 annually.
That $8,000 was taken out of their $80,000 net income, reducing their income to $72,000.
Educated/rockstar family:
Jordan and Renee have a family-owned car washing business. Last year, they also made $100,000.
These people have a 14-year-old daughter, Alexis. Alexis doesn’t get an allowance, instead, she works for her parents. She washes the cars, cleans the office, shreds paper, stuffs envelopes, and anything else she can do.
Her parents pay her $10,000 a year to help with the business. Alexis does NOT need to pay taxes on her income because it is within the standard deduction (currently $12,200.)
In addition, Alexis participates in gymnastic competitions. The competitions average $300 a month. Alexis now pays for her own gymnastics with tax-free money. And if Alexis wants to hang out with her friends at a football game, she also pays for that.
Now, her parents no longer have to pay for their daughter’s expenses with taxed income. Also, Jordan and Renee are able to take a tax deduction on their daughter’s salary – thus reducing their taxable income!
Most importantly, Jordan and Renee studied financial independence. They taught Alexis the importance of saving and investing money. Their daughter has been saving her hard-earned money up and is going to buy her first car when she turns 16 – all with tax-free money.
It’s a great tax strategy to hire your kids
Both you and your child(ren) can take advantage of tax benefits when you hire your kids. As long as you pay them the standard deduction or lower, you get to write off the entire amount as an “outside labor” expense.
Furthermore, your kid’s earnings will be tax-exempt. Now, you can pay for some of your child’s expenses with tax-free money that you otherwise would have paid with after-tax money.
Gives your child a head start
When you hire your kids, they are going to learn responsibility, how to manage money, become entrepreneurs, develop a work ethic, and other important life skills. Money aside, I believe this is truly one of the best things you can do to set your kids up for success.
If you help your child manage their money (which should be a no-brainer) and can help them save up for things like a car, prom, etc. You can also set up a Custodial Roth IRA for your child and have them contribute to their investment account.
Think about how far ahead your child will be if they graduate high school with a paid-off car and an IRA. You can truly set them up for a great start in life – all tax-free.
Is this legal?
Yes! In fact, the government wants small business owners like yourself to hire your kids! They know that kids turn into adults. And if your kids become hard-working and outstanding adult citizens… that means the government is less likely to have to pay out money to your adult kids in the future.
Offering this tax benefit is an investment for the government.
What are the rules?
There are a couple of rules that you need to follow to properly hire your kids.
- Your child must work as a real employee – work must be ordinary and necessary. Who decides what work is ordinary and necessary? You do. That’s why it’s important to study this information.
- The pay must be reasonable – do not try to get away with paying your child $100 to shred a piece of paper.
- You must document everything – your child should have their own bank account. You should transfer money into their account from your business account. You should also be keeping a record of the work that they do, how much time they spend working, and when you pay them. As with any other employee, proper record keeping is important.
- You must fill out your IRS forms – some of the forms you will need to send to the IRS is a W-4, I-9, and W-2.
What if I have more than one kid?
You can pay EACH CHILD up to the standard deduction tax-free. You just need to fill out the proper tax forms for each child.
What are my next steps?
If you haven’t heard about this incredible tax strategy, that’s because the U.S. tax code is huge. Currently, it’s nearly 74,000 pages.
It’s impossible for accountants and tax professionals to know everything in the tax code. It’s also not likely that these specialists are going to sit down with each client and find every tax benefit they qualify for (unless you have a REALLY good one.)
That’s why it is important for YOU to know what benefits you qualify for, then ask a tax professional to assist you.
So first, I recommend that you take a course or workshop from a tax professional that revolves around small business finances.
We recommend taking Attorney and CPA Mark Kohler’s Business Owner’s Workshop. He holds a live workshop every year, but you can also get access to his previously recorded workshops online.
I highly recommend taking his course. He not only covers how to pay your kids, but also teaches about building business structure, other tax savings, and wealth building.
Once you learn more about the benefits available to you as a small business owner, go speak with Mark Kohler’s team or a tax professional of your choice. Together, you can start making better financial decisions for your business and family.
Conclusion:
It’s not hard to take advantage of this major tax benefit for small business owners. By educating yourself on your options, you could save tens of thousands of dollars a year.
Most importantly, when you hire your kids, you are teaching them life skills and are setting them up for success.
The government wants you to take advantage of this tax-break – it’s an investment on their end. If you are a small business owner, stop paying for your kid’s expenses with post-tax money!
P.S. Let other business owners know about this by sharing this post. This kind of information isn’t often spoken about and we need to let each other know.
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