Hiring Children In The Family Business

1,498 views

Published on

Learn how to utilize your children in the family business to save tax.

  • Be the first to comment

  • Be the first to like this

Hiring Children In The Family Business

  1. 1. Hiring Children in the Family Business David W. Swatosh, CPA Phone: Ext. 7147 Email: david.swatosh@rehmann.com
  2. 2. Agenda <ul><li>Considerations </li></ul><ul><li>Income Shifting </li></ul><ul><li>Kiddie Tax Implications </li></ul><ul><li>Retirement Savings </li></ul><ul><li>Education Credits </li></ul><ul><li>Payroll Tax Savings </li></ul>
  3. 3. Considerations <ul><li>Pay must be reasonable </li></ul><ul><li>Perform work necessary for the business </li></ul><ul><li>Pay by check (same as other employees) </li></ul><ul><li>File W-2’s and include on payroll tax forms </li></ul><ul><li>Follow the Fair Labor Standards Act </li></ul>
  4. 4. Income Shifting <ul><li>Shift income from higher (35%) tax bracket to lower tax bracket </li></ul><ul><li>$5,700 (2010) Standard Deduction (Rev. Proc. 2009-50) </li></ul><ul><li>No Exemption Allowed </li></ul>
  5. 5. Example <ul><li>Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works part time earning $6,000. </li></ul><ul><li>What are the tax implications? </li></ul>
  6. 6. Income Shifting <ul><li>By shifting $6,000 of income the family saved $1,950 in taxes </li></ul>Parents: Child’s Wages $6,000 Tax Rate 33% Tax Savings $1,980 Child: Child’s Wages $6,000 Stand. Deduction ($5,700) Taxable Income $300 Tax Rate 10% Tax Due $30
  7. 7. Kiddie Tax Implications <ul><li>Unearned income (greater than $1,900) taxed at the parents tax rates (Sec. 1(g)) </li></ul><ul><li>Age Test </li></ul><ul><li>Support Test </li></ul>
  8. 8. Example <ul><li>Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works full time earning $10,000 (more than half of his support) and has dividend income of $3,500. </li></ul><ul><li>What are the tax implications? </li></ul>
  9. 9. Kiddie Tax Implications <ul><li>By shifting $10,000 of income and avoiding the Kiddie tax the family saved $2,209 in taxes </li></ul>Parents: Child’s Wages $10,000 Loss of Exemption ($3,650) Inc. subject to Kiddie Tax $1,600 Total Inc. from Child $7,950 Tax Rate 33% Tax Savings $2,624 Child: Child’s AGI $13,500 Exemption ($3,650) Stand. Deduction ($5,700) Taxable Income $4,150 Tax Rate 10% Tax Due $415
  10. 10. Retirement Savings <ul><li>Traditional IRA contributions up to $5,000 for 2010 (Sec. 219) </li></ul><ul><li>Tax is deferred until distributed </li></ul><ul><li>Phase-out for single starts at $56,000 </li></ul>
  11. 11. Example <ul><li>Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works full time earning $10,000 (more than half of his support) and has dividend income of $3,500. Son also contributes $5,000 to a traditional IRA. </li></ul><ul><li>What are the tax implications </li></ul>
  12. 12. IRA Contribution <ul><li>By shifting $10,000 of income, contributing $5,000 to a traditional IRA and avoiding the Kiddie tax the family saved $2,624 in taxes (however may want to consider Roth IRA) </li></ul>Parents: Child’s Wages $10,000 Loss of Exemption ($3,650) Inc. subject to Kiddie Tax $1,600 Total Inc. from Child $7,950 Tax Rate 33% Tax Savings $2,624 Child: Child’s AGI $13,500 Exemption ($3,650) IRA Deduction ($5,000) Stand. Deduction ($4,850) Taxable Income $0 Tax Rate 10% Tax Due $0
  13. 13. Education Credits (Sec. 25A) <ul><li>Hope Scholarship Credit </li></ul><ul><li>Lifetime Learning Credit </li></ul><ul><li>NEW: American Opportunity Credit </li></ul><ul><li>Parents can forgo the dependency exemption for the child (Treas. Reg. Sec. 1.25A-1(f)(2) </li></ul>
  14. 14. Example <ul><li>Facts: Mom owns S Corp and is in the 33% tax bracket and is disqualified from claiming education credits. Son works full time and earns $10,000 while home from college (more than half of his support) and had $4,000 in qualifying tuition expenses. </li></ul><ul><li>What are the tax implications? </li></ul>
  15. 15. Education Credits <ul><li>By shifting $10,000 of income the family saved $3,096 in taxes </li></ul>Parents: Child’s Wages $10,000 Loss of Exemption ($3,650) Net effect on T.I. $6,350 Tax Rate 33% Tax Savings $2,096 Child: Child’s Wages $10,000 Exemption Stand. Deduction ($3,650) ($5,700) Taxable Income $650 Tax Rate 10% Tax Due $65 AOTC $1,065 Tax Refund $1,000
  16. 16. Payroll Tax Savings <ul><li>Child’s earnings could be exempt from FICA and FUTA </li></ul><ul><li>Child must be under age 18 (FICA) or 21 (FUTA) </li></ul><ul><li>Unincorporated businesses or husband and wife partnerships </li></ul>
  17. 18. Circular 230 <ul><li>Please Note: This document is intended for internal training purposes only </li></ul><ul><li>NOTICE TO PERSONS SUBJECT TO UNITED STATES TAXATION: DISCLOSURE UNDER TREASURY CIRCULAR 230 </li></ul><ul><li>The United States Federal tax advice, if any, contained in this document and its attachments may not be used or referred to in the promoting, marketing, or recommending of any entity, investment plan, or arrangement, nor is such advice intended or written to be used, and may not be used, by a taxpayer for the purposes of avoiding Federal tax penalties. </li></ul>

×