Wanted to post in LPT, but their rules said no financial tips. Hope I'm not breaking any rules here and/or stating the obvious.
This is one of those great strategies that seem criminally underutilized. The vast majority of time, the benefits greatly outweigh the costs. There are three main benefits that synergize nicely; 3 birds you can whack with one stone:
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Tax savings via shifting from your taxes to your child's taxes. This is mainly when your child wouldn't otherwise be working; you can essentially turn your income, which would be taxed at 12%, or 22%, or more, into 0% tax up to the standard deduction for your child (currently $12,000). If your small business is particularly lucrative and/or if you or your spouse makes high income as an employee, you could be paying your kid even more than $12,000 gross wages per year and still benefit (such as shifting business income from your 22% rate to your child's 12% rate).
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Convenient source of clean record keeping. When I worked at a CPA firm it was always a shame to see clients struggling with audits because they recorded deductions, but had no idea where the receipt for those deductions were. You'd be surprised how useful information from invoices and receipts are when speaking with your vendors, taxing authorities, and so on.
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Teach your child about financial management early. They'll have a chance to see how you conduct business, and may end up filing tax returns earlier than their peers. Of course, there is the classic "value of a dollar" teaching moment as well.
Naturally, this method isnt for exactly everyone. Payroll does require you to either pay a payroll processor, or, if you're savvy with numbers vs. regulations, a time sink and acceptance of risk for running your own payroll, so this would incur some sort of extra cost on your end, whether via time or money. You do have to comply with labor laws, such as paying minimum wage for your child's age. And you have to weigh the impact the decision may have on your family relationships, and perception of other employees as applicable. But in general, these are minor costs compared to the benefits, mainly the three listed above.
Talk to your CPA today to see if this treatment is right for you!
Submitted April 12, 2019 at 11:35PM by Adghar http://bit.ly/2Z8g06V
