Got your kids on payroll yet?
When you hire your under-age-18 child, you shift taxable income from you to your child.
Why does hiring family members matter?
Because if you’re single with taxable income of $40,526 or higher – or married with $81,050 or higher – you’re in the 22% (or higher!) federal tax bracket.
At the same time, your child is in the 0% tax bracket on the first $12,550 they earn.
Think of it this way: $12,550 deduction for you, and no taxable income for your child.
Tax strategists call this a “shifting strategy”: you shift income downstream from your higher bracket to another family member’s zero bracket. If you’re in the 22% tax bracket, you’re saving $220 in tax for every $1,000 your income you shift into your child’s ‘paycheck’.
Wait, it gets better.
If your child earns more than $12,550, then the tax they pay on the next $9,950 they earn is only 10%. Again, far less than 22%.
If these numbers are making your head hurt, just know this. Putting kids on payroll is a smart move.
And even smarter if your real estate business is structured tax-wise as a sole proprietorship or husband & wife partnership.
Because when your business is not structured as a corporation, it is exempt from FICA when employing your children under age 18. And the business is also exempt from unemployment tax.
Which means you not only save on income taxes, but you also save on payroll taxes.
Most business owners don’t even think to hire their kids, but it’s a beautiful tax saving strategy.
And it supports college savings using pre-tax dollars.
The only problem is many self employed small business owners don’t implement the strategy properly.
They fail to keep adequate payroll records, create a job description, require time sheets, fill out government forms property, nor timely file with the right agencies.
They end up dusting up trouble and potential penalties with IRS and state agencies that they shouldn’t have to deal with.
For these reasons, it’s best to consult with a tax professional to make sure you do things the right way, at the right time.
If you’re looking for income tax help in general, or for help specifically to put kids on payroll the right way, please contact me at 757-346-1040 or [email protected]