Are you a business owner in the United States? Have you ever considered hiring your child to work for you during summer vacation, winter break, or after school? Not only will your child gain valuable work experience, but you’ll benefit from a smart tax-savings strategy.
The Tax Cuts & Jobs Act brought many changes to the tax world, including the standard deduction amounts that enable taxpayers to enjoy a certain amount of tax-free income. Prior to tax reform, the standard deduction for single filers was $6,350. That means the first $6,350 that a person earns is not taxed. Starting with the 2018 tax year, single filers hit the jackpot with a standard deduction of $12,000, almost doubling previous exclusion amounts.
This increased standard deduction isn’t just for working adults. It is applicable to kids, too. If you hire your child to work in your business, you can compensate your child up to $12,000 in wages without incurring income taxes and other taxes that kids under 18 are exempt from paying. The salary you pay your child can be deducted as a business expense from your business income, subjecting you to lower tax liability.
“Building generational wealth is about getting the right information and using it,” says Dr. Lynn Richardson, celebrity financial expert and author of The Symphony: A Guide to Creating and Balancing Multiple Streams of Income. “Getting a $12,000 tax deduction per child minimizes your taxes by thousands, allows you to get back more money, and exposes your child to entrepreneurship at an early age. This is the single-largest game-changer that many people don’t know about.”
There are different rules for different types of businesses, so make sure you talk to a trusted tax professional and CPA to map out the best plan for you. Hiring your child can be a huge business benefit, but you need to make sure you do it correctly to avoid the IRS spotting any red flags.
Here are some things to consider to get you started:
DETERMINE THE BEST JOB DESCRIPTION
If you are the sole proprietor of your own business, consider employing your child (under the age of 18) for certain tasks. Start by writing a list of all the things you may need help with for your business. Next, identify ways that you can use your child’s natural gifts and strengths to advance your business needs and goals.
In Richardson’s latest book, she shares a list of job ideas for your child. For example, your child can help with social media, event planning, or customer service. If you have a younger child, you can use them as a model in still photos to promote your business! Once you’ve found a match between your child’s skills and the needs of the business, you can successfully create an appropriate title and job description.
MAINTAIN APPROPRIATE RECORDS
You want to think about creating an employment contract, onboarding documentation, timesheets, and tax forms to ensure you remain compliant with the IRS.
“Work with your CPA to put your kids on the payroll and [to] keep you abreast of the amount of money you can pay your child before their income reaches higher tax brackets,” says Jeff Wilson II, author of The Lies Our Parents Were Sold and Told Us and principal CPA at The W2 Group accounting firm.
Documentation is key. You also want to have the right professionals by your side to ensure you have the right documentation to support your child’s work.
CREATE MORE OPPORTUNITIES FOR YOUR CHILD
It’s not just about reducing your taxes and giving your kids income to use now. It’s about teaching your child business and money strategies that they can use to create a financially successful future.
Encourage your child to save their money in a retirement account or contribute cash directly to the account. For example, if your child contributes money to a Roth IRA, they are saving for retirement and can use the money (without penalty!) toward qualified educational expenses or for a down payment on a home if needed. Creating smart savings and investing strategies now can help your child accumulate $1 million before they reach 50!
Source: Black Enterprise Contributors Network