As an owner of a organization, hiring your children to work for you can reduce your family's combined income, the amount of taxable income, or both. This is true whether your firm is a corporation, partnership, or sole proprietorship. When you hire your children in the firm, it allows you to use their earnings, and the costs of their retirement plans as tax deductions. Also, some staff benefits are tax-exempt to family members.
Helpful benefits - now and later
If a business owner has an infant child and hires his spouse as an employee, the fees for child care while his wife is working can be partially offset by taking advantage of the child care tax credit. Furthermore, the firm may be allowed to develop a company sponsored retirement plan to help save for their partner's retirement, and possibly their family member's retirement. In essence, it is never too soon to adopt a plan.
Retirement plan contributions that are made by the business are generally tax deductible. However, there are certain laws that are imposed by the IRS. So let's suppose that your child is a teenager who is good at bookkeeping. If you pay her according to the usual rate for a bookkeeper, and maintain a record of his or her hours, your child's wages can be reported as a business cost.
If you elect to employ a family member under age 18, their income are free of Social Security tax as long as the business is not a corporation. If your child's total compensation does not exceed the maximum standard deduction of $6,100 (2013 figure), their income is tax-exempt. Furthermore, income that is more than this number are taxed at the child's tax rate, which is generally less than the parent's rate. If you hire a child younger than 18, their compensation is free of Social Security tax, as long as your company is not incorporated.
IRAs are a good choice for families
Contributing to an Individual Retirement Account (IRA) is a good option if your business does not currently offer a qualified retirement plan. The biggest benefits of IRAs are tax-deferral of income, and possible tax deductible contributions (depending on the type of IRA). For staff members under 50, pay deductions are restricted to $5,500 (2013 figure) and subject to certain income limits. Payments received before 59 and a half may involve a 10% federal income tax penalty, as well as the usual taxes on individual earnings. But, there may be some exceptions to this.
Health benefits
If your family members are employees, they could be allowed to obtain other benefits through the business. They can include health and accident coverage, group term life insurance, and disability. The going rates for offering these benefits can also be deducted as business expenses.
In order to receive these tax advantages, family staff members must perform their specific roles, and be compensated no more than the usual rate for their job function. Also, taxes on any retirement plan (there are many) are closely controlled by statutes that effect both business owners and worker's. In essence, there are obvious financial benefits to hiring family members as employees. Talk to your tax advisor for assistance.
Helpful benefits - now and later
If a business owner has an infant child and hires his spouse as an employee, the fees for child care while his wife is working can be partially offset by taking advantage of the child care tax credit. Furthermore, the firm may be allowed to develop a company sponsored retirement plan to help save for their partner's retirement, and possibly their family member's retirement. In essence, it is never too soon to adopt a plan.
Retirement plan contributions that are made by the business are generally tax deductible. However, there are certain laws that are imposed by the IRS. So let's suppose that your child is a teenager who is good at bookkeeping. If you pay her according to the usual rate for a bookkeeper, and maintain a record of his or her hours, your child's wages can be reported as a business cost.
If you elect to employ a family member under age 18, their income are free of Social Security tax as long as the business is not a corporation. If your child's total compensation does not exceed the maximum standard deduction of $6,100 (2013 figure), their income is tax-exempt. Furthermore, income that is more than this number are taxed at the child's tax rate, which is generally less than the parent's rate. If you hire a child younger than 18, their compensation is free of Social Security tax, as long as your company is not incorporated.
IRAs are a good choice for families
Contributing to an Individual Retirement Account (IRA) is a good option if your business does not currently offer a qualified retirement plan. The biggest benefits of IRAs are tax-deferral of income, and possible tax deductible contributions (depending on the type of IRA). For staff members under 50, pay deductions are restricted to $5,500 (2013 figure) and subject to certain income limits. Payments received before 59 and a half may involve a 10% federal income tax penalty, as well as the usual taxes on individual earnings. But, there may be some exceptions to this.
Health benefits
If your family members are employees, they could be allowed to obtain other benefits through the business. They can include health and accident coverage, group term life insurance, and disability. The going rates for offering these benefits can also be deducted as business expenses.
In order to receive these tax advantages, family staff members must perform their specific roles, and be compensated no more than the usual rate for their job function. Also, taxes on any retirement plan (there are many) are closely controlled by statutes that effect both business owners and worker's. In essence, there are obvious financial benefits to hiring family members as employees. Talk to your tax advisor for assistance.
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