If you are a proprietor, there's one distinct advantage you have over firms that have incorporated. You can hire your children, so long as they are under eighteen, and pay no federal or state payroll taxes. And apparently they don't pay any income taxes on the moneys they receive.
As an example, if you employ your less than 18-year-old child to work in your sole proprietorship and pay he or she a reasonable sum of $10,700 (primarily based on 2010 IRS amounts) for work that was done, you get the write-off and the child files a tax return showing no income tax liability. How can this be accomplished?
You have to file a few payroll tax forms, such as a quarterly Form 941, an annual Form 940, and W-2 for the child. However , you pay no payroll taxes if you are a proprietor and paying the salary of your under-18 years-of-age child. Also, there aren't any workmen's compensation costs or state unemployment costs. You'll have to note on these payroll tax returns that you are paying your under-18 child's wages. The minor must file a yearly individual 1040 showing the $10,700 in salary on line seven of the 1040. If the minor takes out an IRA for $5,000, that leaves $5,700 in adjusted gross income. On page 2 of the 1040, the minor can take the standard deduction of $5,700 which leaves zero as taxable revenue. Also, the minor can still be claimed by you as a dependent on your income taxes.
Remember, the check must be written to the child and deposited into his or her checking account. But a minor child cannot operate a checking account without the joint signature of the parent. Therefore, you can control the account so the minor does not waste the money. The minor can gift the cash back to the parent, pay rent or at the very least pay for their own education, but be careful with this. You must be reasonable. The child's duties need to be bonafide, documented and consistent with your payroll policies.
The great thing about this tax move is that you deducted $10,700 from your sole proprietorship and saved 43.3 percent (calculated using a 28 percent tax bracket plus 15.3 percent self employment tax rate) in taxes and your kid paid zero on his tax return. The amount saved is about $4,600.
If you do not have a proprietorship, you can open one and then you'll be in a position to take advantage of these tax deductions. See your tax professional for more.
As an example, if you employ your less than 18-year-old child to work in your sole proprietorship and pay he or she a reasonable sum of $10,700 (primarily based on 2010 IRS amounts) for work that was done, you get the write-off and the child files a tax return showing no income tax liability. How can this be accomplished?
You have to file a few payroll tax forms, such as a quarterly Form 941, an annual Form 940, and W-2 for the child. However , you pay no payroll taxes if you are a proprietor and paying the salary of your under-18 years-of-age child. Also, there aren't any workmen's compensation costs or state unemployment costs. You'll have to note on these payroll tax returns that you are paying your under-18 child's wages. The minor must file a yearly individual 1040 showing the $10,700 in salary on line seven of the 1040. If the minor takes out an IRA for $5,000, that leaves $5,700 in adjusted gross income. On page 2 of the 1040, the minor can take the standard deduction of $5,700 which leaves zero as taxable revenue. Also, the minor can still be claimed by you as a dependent on your income taxes.
Remember, the check must be written to the child and deposited into his or her checking account. But a minor child cannot operate a checking account without the joint signature of the parent. Therefore, you can control the account so the minor does not waste the money. The minor can gift the cash back to the parent, pay rent or at the very least pay for their own education, but be careful with this. You must be reasonable. The child's duties need to be bonafide, documented and consistent with your payroll policies.
The great thing about this tax move is that you deducted $10,700 from your sole proprietorship and saved 43.3 percent (calculated using a 28 percent tax bracket plus 15.3 percent self employment tax rate) in taxes and your kid paid zero on his tax return. The amount saved is about $4,600.
If you do not have a proprietorship, you can open one and then you'll be in a position to take advantage of these tax deductions. See your tax professional for more.