Pay Your Children to Work for You with the Blessing of the IRS

Save on Taxes by Hiring Your Children

You've heard that you can't have your cake and eat it, too. But hiring your own family is one case when you can. Pay your minor or adult children to work for your business, then write it off as an expense.

Many people are confused about whether it's legal to hire their children and grandchildren. Follow my advice to satisfy both the IRS and employment laws - while saving on your own taxes. Assuming it's a true payment for services performed (and the paperwork is handled properly) it's totally legal and acceptable to pay family members.

Minor Children Save the Most Taxes

Child labor restrictions don't apply to a parent (unless it's in manufacturing, mining, or any hazardous occupation defined by the Department of Labor) - even under 16. I hired my own daughters from the ages of 7 and 9 without a hitch.

You need not pay withholding income taxes, payroll taxes (including Social Security) and Workmen's Compensation (in most states) until the child turns 18. Just remember to complete quarterly payroll tax returns, as you must for any employee. Forget about paying federal unemployment taxes until the child turns 21.

However, if your business is an S or C Corporation, you must pay Social Security and Medicare taxes regardless of their ages.

To Survive IRS Scrutiny

1. The children actually have to work
2. Pay them consistently
3. Pay them according to what you'd pay someone else
4. Keep detailed records
5. Issue a W-2 at year end and file a tax return for the child, even if no tax is owed


Example:
Wages paid to 13 year old child $6200
Less: Standard deduction for 2005 (5000)
Taxable income $1200
Tax Due (10% x $1200) $ 120

While for the parents:
Wages paid to the child $6200
Tax Savings (40% x $6200) $2480

For a net savings to the family of $2360


The income tax standard deduction is $5000 for every person in the country, including each of your minor children. So unless you pay them more than that, they won't have any tax obligation at all. And since they really earned it, the "kiddie tax rules" do not apply.

When hiring adult family members you can justify larger salaries. And they can participate in benefits like qualified retirement benefit programs and fringe benefits (like medical insurance and childcare).

Working for You Teaches Children about Managing Money and Saving

The income has to be earned by the child, so the amount needs to reflect the value of what's done. And the money does belong to them, even if it's being saved for college.

Many of the benefits of involving your children in your operation aren't tax-related at all. They're gaining practical experience, learning the value of work, and maybe how to carry on the family business down the road.

If you're wondering whether to trust my advice, I've sat on both sides of the desk. I worked for the IRS, and since leaving there have conducted almost a thousand seminars on financial planning and taxes. I speak to real estate and banking professionals all over the country, and have found that everyone wants to learn smart strategies that bring reliable financial returns - without getting them into tax trouble. In my opinion, hiring your family is one of them.

Don't hesitate to put the troops to work. When you hire your children you're teaching them skills they'll be able to use for the long haul. They're learning the value of a dollar - and how hard you have to work to earn them. And bottom line, it makes good financial sense as well.

Is Preparing Your Tax Return Online Safe?

There are many ads online on companies offering to help you or prepare for you your tax return. But if you are the type who is even afraid to give out your credit card number on some shopping site shouldn't you be scared to give out more information about you such as your social security number, your income, source of interest, dividends, investments, your job data, information about your spouse, children, etc. and other relevant data on the internet?

It is true that there are many hackers online who are out to obtain secure information and files. In fact, there have been reports of IRS not being that secure as well since they have lost returns but these were in the past. But if indeed it is not that safe to be giving secure information online and to be having these online companies prepare your return for you, then these companies shouldn't have existed in the first place.

Many of the online companies offering tax preparation services offer affordable prices for their basic preparation but as your return gets complex then the prices start to rise. A price quote is important before your return is actually processed. At least, you get to back out or decline if you find the price to be steep for your actual budget. You should do this before you transmit your return otherwise you will be subjected to pay for the charges. If the price gets too high, you might be better off meeting with a professional face to face.

It would be wise when having a quote to initially not use your own social security number or actual address for example until you are satisfied with the computations, the process and the price. Only then, should your provide your true data in order to provide the necessary protection early on.

If you must file online, choose companies that are large and established most especially those who have the ability to create and develop sites that are secure. It is also important that they have the pockets to sue in instances when their security has been breached or secured information has been stolen from them. There are actually major online processors with which IRS have made arrangements to offer free services especially for certain taxpayers that need help. IRS also has other Alliance Members.

It is advised that you stay away from companies that have only been in existence for a short period of time. It should have a contact number of their office as well as an address. Search for them online and try to find out if there have been any complaints about their services.