| Hire your kids instead of paying them an allowance! | | | | only other specific restriction is that this money |
| It is quite common to see children actively involved in | | | | cannot be used for your child's lodging or meals. [Rev. |
| the family business. Even young children can perform | | | | Rule 73-393] |
| valuable services. Many business owners, however, | | | | So, you simply tell your child, "I will withdraw $10 (for |
| miss out on the major tax savings generated by | | | | example) out of each week's pay for you to spend |
| actually hiring their children and paying them a fair | | | | any way you wish, however, the other $90.00 will |
| wage for their services. | | | | stay in the (interest-bearing) account to be used by |
| The expense is tax-deductible to you, and the | | | | you to pay for your________." |
| income is tax-free to them. [Reg Sec 1.162-7(a) ] The | | | | Fill in the blank with words like car, graduation trip, |
| tax-free limit for dependent children was $5,350 per | | | | wedding, or whatever you like. |
| child per year for 2007, and it tends to be increased | | | | Did you ever, in your wildest dreams, anticipate that |
| somewhat each year. The amount is equal to the | | | | you would be able to pay for school supplies and |
| Standard Deduction. | | | | tennis shoes, or pay for cars, trips, and weddings out |
| [Rev. Proc. 95-53 and IRC Section § 63(h)(2) ] | | | | of pre-tax dollars? It's true! It's real! And it's 100% |
| In order to qualify, the wages must be reasonable in | | | | legal! |
| amount, based on services actually rendered and | | | | There's another practical benefit to this strategy that |
| documented as paid. Children as young as seven | | | | is at least as important as the tax benefits. Your child |
| years old have been found to qualify as employees | | | | children will begin learning the value of a dollar. |
| of the parents' business. [Reference Eller v. | | | | Imagine being at the mall to buy a new pair of shoes. |
| Commissioner, 77 T.C. 934 (1981) ] | | | | The child has to decide whether he or she wants the |
| And if they are family members under 18 working for | | | | $150 designer-label brand or the $45 generic brand - |
| a sole proprietorship, they are exempt from payroll | | | | knowing that whatever they have left in their |
| taxes [IRC Section § 3121(b)(3)(A) and § | | | | checking/savings account will be theirs someday, to |
| 3306(c)(5) ] and the business is not required to | | | | pay for their car, trip, college, wedding, etc. |
| withhold or to pay Social Security and Medicare | | | | Isn't that a great tax-savings strategy and a great |
| taxes. [Tax Court Ruling 48 TC 439, 450 (196) in the | | | | learning opportunity for your children? |
| case of Denman v. IRS Commissioner] | | | | Next - Hire Your SPOUSE, So You Can Write Off |
| For incorporated business owners, your corporation | | | | Medical "Out-of-Pocket" Expenses for YOURSELF! |
| will have to pay payroll tax and you do need to | | | | This applies to sole proprietor entities only. When |
| withhold social security/medicare from the children's | | | | your spouse is an employee of your home-business, |
| wages, but the benefits are still well worth it. | | | | he/she is eligible for "benefits" from his/her employer |
| In order to qualify, the wage rate has to be | | | | (that's you), and those benefits are deductible as |
| "reasonable and customary" within your region of the | | | | business expenses. [IRC Section § 162(a)] |
| country and within your industry for the type of | | | | So you establish this benefit as company policy: Any |
| work being performed. These wages must be paid | | | | and all employees and their family members (again, |
| and the appropriate payroll tax returns and W-2 | | | | that includes YOU) will be reimbursed (by the |
| forms filed with the IRS and Social Security | | | | home-business) for all medical-related expenses not |
| Administration. Before hiring your children, check with | | | | covered under any other insurance plan he/she may |
| your tax pro to be sure your documentation and | | | | have under another employer. |
| reporting will follow the rules. [Revenue Ruling 73-393] | | | | "Any and all employees" means your spouse and |
| The kids (as employees) should document what they | | | | your children, "and all members of their family" |
| did to earn the money, [Revenue Ruling 73-393] so | | | | includes YOU. |
| have them fill out a simple "work log" with headings | | | | A Word of Caution: Only establish this company |
| like:o Date they workedo Type of work performedo | | | | policy if your business will be hiring only your own |
| Amount of time spent workingo Hourly rate you paid | | | | family members. If you establish this policy and then |
| them | | | | hire non-family members, you will be required to |
| ** Pay Attention Here ** | | | | offer this benefit to them as well, and that could |
| We're about to show you how to pay for...o The car | | | | defeat the purpose. |
| your high-schooler wantso Designer-label clothes the | | | | So What Just Happened? |
| kids demando Movie and Concert ticketso A High | | | | You just set into place a strategy for legally |
| School graduation tripo College tuition, books and | | | | tax-deducting all annual insurance plan deductibles, |
| supplieso Your daughter's expensive weddingo And | | | | co-pays for doctor visits, prescription drugs, and |
| lots of other personal out-of-pocket expenses | | | | non-covered expenses like braces, glasses, contact |
| ALL in PRE-TAX Dollars! | | | | lenses, dental work, and possibly even cosmetic |
| Here's how you can do this... | | | | surgery. [Reg Sec 71-588; Plr. 9409006] |
| The tax-deductible $5,350/year Uncle Sam lets you | | | | No minimum thresholds apply; every single dollar is |
| pay your children as employees, is equivalent to | | | | tax-deductible by the business as an employee |
| about $100.00 per week! But, you say, "Who gives | | | | benefit cost. |
| their kids a $100.00 per week allowance?" YOU might | | | | It is important that this "policy" be established in |
| now! And here's why... | | | | writing, as a legal document and that the benefit is |
| Let's say you come up with the tax-free limit of | | | | reasonable in relation to the level of services |
| about $100.00 per week worth of business related | | | | provided by the employee to your business. In |
| "chores" for them to do. After they turn in their | | | | Appendix C to this system you will find a sample |
| "work log", you then pay them by check. So, you'll | | | | fill-in-the-blanks "Self-Insured Medical Reimbursement |
| have to open a separate checking account for them | | | | Plan", which you may feel free to adopt or adapt, if |
| to deposit and cash payroll checks. Of course, you | | | | you wish. [Reg Sec 1.105-5(a)] |
| will deposit every week's $100.00 paycheck into that | | | | A Word About the Level of Your Spouse's Wages |
| account. Make sure it's an interest-bearing account. | | | | A sole practitioner (Schedule C taxpayer) is not |
| (You will see why in a minute.) | | | | required to pay Unemployment Taxes on the |
| The bank will require it to be a "joint account" with | | | | employment of a spouse; however the business is |
| you, since they are minors. Although it is technically a | | | | required to pay Social Security and Medicare payroll |
| "joint" account, only you will be authorized to make | | | | taxes on adult family-member employees. |
| withdrawals or to write checks on that account, | | | | Since those taxes are calculated based on a |
| since the child is a minor. | | | | percentage of the employee's wages, the lower the |
| Reader Alert! Here is Where It Gets REALLY | | | | wage level, the lower the payroll taxes will be. Even if |
| Interesting... | | | | you employ your spouse at "minimum wage", you |
| The law requires you to pay them the wage they | | | | qualify to use this medical expense reimbursement |
| earned, in order for you to be able to deduct the | | | | tax strategy, so long as this benefit is reasonable in |
| amount as a business expense. | | | | relation to the level of services provided by your |
| These funds can now be used in a variety of ways | | | | spouse. |
| so long as they are for the benefit of your child. The | | | | |