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.
For example, if you hire your under-18 years-of-age kid to work in your proprietorship and pay him or her a fair wage of $10,700 (based on 2010 tax figures) for services rendered, you get the deduction and the minor files a return showing no taxable liability. How is that done?
You must file several payroll tax forms, including a quarterly Form 941, a yearly IRS Form 940, and W-2 for the minor. Nevertheless, you pay zero payroll tax if you're a sole proprietor and paying the income of your minor child. Also, there are no workmen's comp insurance or unemployment. You will have to document on these payroll tax statements that you're paying your minor child's salary. The child must file an annual individual tax return showing the total wages on line 7 of the 1040. If the child takes out an Individual Retirement Account for $5,000, that leaves $5,700 in AGI (adj gross income). On page two of the return, the child deducts a standard deduction of 5,700 for 2010 which leaves 0 as taxable earnings. In addition, the child can still be claimed by yourself as a dependent on your tax return.
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 fantastic 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 youngster paid 0 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 ready to take advantage of these tax deductions. See your tax professional for more.
For example, if you hire your under-18 years-of-age kid to work in your proprietorship and pay him or her a fair wage of $10,700 (based on 2010 tax figures) for services rendered, you get the deduction and the minor files a return showing no taxable liability. How is that done?
You must file several payroll tax forms, including a quarterly Form 941, a yearly IRS Form 940, and W-2 for the minor. Nevertheless, you pay zero payroll tax if you're a sole proprietor and paying the income of your minor child. Also, there are no workmen's comp insurance or unemployment. You will have to document on these payroll tax statements that you're paying your minor child's salary. The child must file an annual individual tax return showing the total wages on line 7 of the 1040. If the child takes out an Individual Retirement Account for $5,000, that leaves $5,700 in AGI (adj gross income). On page two of the return, the child deducts a standard deduction of 5,700 for 2010 which leaves 0 as taxable earnings. In addition, the child can still be claimed by yourself as a dependent on your tax return.
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 fantastic 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 youngster paid 0 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 ready to take advantage of these tax deductions. See your tax professional for more.