If you own a home based business, paying your children a tax-deductible allowance to work in your business is a good thing.
The employment must be bona fide and the salaries paid must be reasonable for the services performed.
However, even a young child can be employed for such services as cleaning your office, opening mail, mailing letters, etc.
When hiring your children, the biggest tax break is that wages paid to a child under the age of 18 is exempt from Social Security and Medicare taxes.
This means that you can deduct the wages you pay to your children from your income without the added expense of paying the approximately 15% Social Security, and Medicare taxes on their compensation.
The work may be full or part-time, or even done only during their summer vacations.
A second big savings is possible because a dependent child with earned income pays zero income taxes on the first $3,700 of earned income.
This means if you hire each of these minor children part-time and pay each $3,700 for the services, their taxes are zero.
The money remains in the family unit, and your total savings in federal, state, local income taxes, and Social Security and Medicare taxes approaches 50% of the total $11,100 wages: About $5,550 saved.
In addition, another $2,000 could be paid tax-free to each child if placed in an IRA retirement account.
This produces another potential $1,000 family-unit tax saving for each child you do it for.
Keep good records or a journal to document wages (pay by check only!), hours worked and work done.
No records means no deductions.
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