Generally, anyone with children can take advantage of one of the greatest tax saving opportunities granted by Congress. This tax benefit was established by Congress to both encourage home businesses with tax free earnings, and also encourage saving for higher education using tax deferred earnings with Educational Individual Retirement Accounts.
For each child employed in the family business, you are entitled to deduct up to $5950 annually tax free for each child. Just the savings in Federal taxes alone approaches $2,000 for each child. At a recent fireside we were explaining this benefit to a group of firefighters from Los Angeles. We were asked this question at the conclusion of our presentation.
“You mean to tell me that if my son pays my grandson $5,950 per year, and puts the entire $5,950 in a joint bank account with no taxes deducted that my son can turn around and spend the money any way he chooses, and then at the end of the year Uncle Sugar will send us another $2,000.”
I am happy to tell you, that’s exactly how it works.
His response was, “…that makes no sense at all.”
There’s nothing logical or sensible about our tax system, but that’s just one of many benefits available to home-businesses.
Here’s how it works:
- Dependent children ages 6–18 (up to 23 if students & still working in the business)
- Pay each child up to $5,950 per year tax free
- If you write them a check for $495.83 for a month’s work then you deposit $495.83 into a joint account established in their name.
- You as con-signer can spend the money any way you choose…no restrictions
When you take the $5,950 deduction on your Schedule C, your Federal refund will approach an additional $2,000!!! 🙂
Here’s what you have to do to qualify:
- Pay them no more and possibly slightly less than you could hire someone to perform the same tasks.
- Keep time sheets and a log of the duties performed. File quarterly and annual payroll reports, for both Federal and state agencies. Issue W2’s at year end.
- This must be a “real” payroll. It has to be documented and treated accordingly.
Here’s what we can do for you:
- Provide you with an employment agreement for each family member.
- Secure the Federal and State Tax ID numbers.
- Prepare a monthly payroll.
- Prepare and file all required Federal and State Quarterly and Annual Reports.
- Give you access to all reports through our simple web interface.
- Provide sample time sheets you can duplicate.
Basically we offer a turn-key service for $144 per year or $17 per month.
Some states do have some minimal fees even though the payroll is tax exempt.