Quickbooks online –Where to start from?January 19, 2017
Employ Your Teens and Youths In Your Business This Summer And Save Some Tax Dollars
Employing your kids in your business has manifold benefits to it. They not only acquire necessary skills and experience but also get to understand the value of money. There is one more hidden aspect of it, “Tax Savings” for your business. This is one of those areas of tax planning that has been grossly underutilized.
Your kids do not pay any federal income tax on upto $6,300 in earned income/w-2 income. They pay NYS tax of 4% above $3,100 in income. You can still claim them as your dependent and take standard deduction and personal exemption. If you put them on payroll in your business during summer they might pay very little or no tax and your business get a deduction for the wages paid to them.
So let’s say you have a pizzeria. Your 15 year old is out of school in summer vacation and would like to help you out. You have an s corporation. You pay him $6,000 in w-2 wages during the entire summer vacation. Your total tax savings assuming you are in 28% federal and 6.65% NYS tax bracket is $ 2,079. Net savings though would be around $1,200 due to NYS tax paid on your kids return and payroll taxes. The savings will be much higher around $1,962 if you are unincorporated i.e. you are reporting your business income on Schedule C or if you are a partnership with your spouse as your partner. This is because kids below 18 years of age are not subject to FICA taxes if they are paid wages out of the above 2 entities.
If you would like to go one step further, you can open a Roth IRA account in your kids name and fund it with upto $5,500. This money now grows tax free and your kids can use it towards his/her college education.
Like you do for all your other business expenses substantiation is important. Make sure you pay your kids reasonable wages. Pay them by check and keep record of the hours they worked. Also make sure you look into NYS labor laws before employing your kids in your business.