As a proprietor (the following only works in a proprietorship), you can hire your children that are under the age of 18 and pay no federal or state payroll taxes. Interestingly, they probably will not pay any income tax on the monies they receive because of the standard deduction limit of $4,700.
For example, if you hire a child who is under the age of 18 years to work in your proprietorship and pay him or her a maximum wage of $7,700 for services rendered, you get that deduction on your tax return at your tax rate that could vary from 15% to 43%. Then the child files a tax return, with you as the parent still claiming the child as a dependant on your tax return, but the child pays no tax on his/her tax return. How is that done?
You should file the following payroll tax forms, a quarterly Form 941 and W-2 for the child. However, you pay no payroll taxes if you are a proprietor and paying the salary of your child who is under the age of 18. Also, there are no workman compensation costs or state unemployment costs. You will have to put a note on the bottom of these payroll tax returns that says: "Wages paid to child of Proprietor under the age of 18." The child must file an annual individual Form 1040 showing the $7,700 wages on line 7. If the child opens an IRA for a maximum $3,000--then that leaves $4,700 as adjusted gross income. On page 2 of the Form 1040, the child deducts a standard deduction of $4,700--leaving zero as a tax income. And the child can still be claimed by you as a dependent on your tax return, assuming the child is living with you, and you are paying in excess of 50% of the living expenses of the child.
Remember, the check needs to be written to the child and deposited into his or her bank account. However, a minor child cannot operate a bank account without the joint guardianship of the parent. Therefore, you can control the account so that the child does not squander the money. I suppose the child can gift the money back to the parent, pay rent, or at least pay for his or her own education expenses. But be careful, you need to be reasonable.
The child's duties have to be legitimate, documented and consistent with your payroll policies.
The beauty of this tax move is that you saved a maximum of $3,000 on your taxes and the child paid nothing.
If you don’t have a proprietorship, start one and then you will be able to take advantage of these tax deductions.
Waite & Associates • Certified Public Accountants • Las Vegas/Henderson, Nevada • 800-666-6250 • 702-733-2727
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