Are there Tax Benefits Of Hiring Your Children? Many benefits exist when hiring your children, at times even other family members, in your own business or home-based business.
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– [Toby] What are the tax
benefits of hiring your children?
Do you want to jump on this one?
– [Jeff] The biggest tax benefit is
your children have a standard deduction
equal to their earned
income wages up to $12,000.
So if you have three children,
you can pay them each $12,000,
they will pay no tax on that income,
and that lowers your income by $36,000,
that 12,000 times three kids.
So there’s a little,
there’s a little tax involved
with it, payroll tax.
They’re not subject to workman’s comp.
They’re not subject to unemployment.
– [Toby] No, they have not
only the standard deduction,
but they also have their IRA.
Like if you paid them 12 grand.
If you had paid tax on the 12 grand,
you would have paid
much higher tax bracket.
Let’s just say you’re in
the highest tax bracket,
and you’re in California,
you’re going to pay 50%.
Your kids make that same 12,000,
they’re not going to pay much of anything,
and they can dump that puppy, part of it,
right into a Roth IRA,
and then they can put the other
half into a traditional IRA,
and shoot, you could even pay them more.
And if you really want to get bent,
you open up a 401K, and you could
have them participate in that as well.
So you could put 19,000 plus
they’ll already have exemption.
So the whole idea between
employing your kids
is that, well, there’s a few things.
First off is, I’m
switching the tax bracket
from me to my children,
or from a higher earning
tax payer to my children.
In many cases it’s going from
the highest bracket to zero.
There’s some employment taxes, yes,
but they also are paying
in and qualifying accounts
towards quarters that
so they actually qualify
for Social Security.
So that’s not necessarily
a horrible thing,
but they’re not paying any
income taxes for the most part.
– [Jeff] And while we talk
about the 12,000 number,
because that’s the standard deduction,
you can pay them more,
if you pay them $20,000,
– [Jeff] they’re still going to
be in a much lower tax bracket.
– [Toby] I would argue that would we
could get them to almost zero.
So let’s say you pay them $20,000,
they got $12,000 standard deduction,
plus they have another 5,000
that they can stick into,
or 6,000 now, into an IRA 2019 so it’s,
so they’re already up to 18,000,
they’re going to pay tax on 2,000 bucks.
What’s that going to be, 200 bucks?
– 200 bucks.
– [Jeff] 10% tax bracket.
– [Toby] See, Jeff’s flippin’ genius.
Pay your kids, and yes, you can
pay your nieces and nephews.
What if they’re over 18?
Well, it’s going to depend.
That’s still your kid, so we don’t care
whether they’re under 18 or over 18.
I don’t care if they’re 40.
It’s a better tax bracket
than yours, then you pay it.
This goes for parents
too, so I should say this,
we always talk about children,
but I have many clients
who are really big earners,
and they have their mom or somebody
doing some stuff for them
who doesn’t have a lot of income,
and I’m like, pay her!
It’s better, well, I’m covering some,
I’m helping her out with
her mortgage or whatever.
It’s like, pay her, pay her!
If she has a house, rent it. (laughs)
Get money to your mother.
Get it out of your tax bracket.
Or your dad or whoever, I say your mother
just cause I’m thinking of
one client in particular.
But it could be any,
any time your tax bracket shopping is
looking for whoever is going
to pay the least amount on it
and heck, if we would
give them money anyway
let ’em do it, so if you
have a kid in college,
pay ’em out of your company,
don’t pay for their tuition for them,
let them pay for their
tuition out of the money
that you pay them out of your company.
– [Jeff] And I know this
is going to come up,
the concept of the kiddie tax,
some of you have heard of that.
The kiddie tax does not apply to
– Active income.
– Active earned income.
Like wages, self-employment income,
but only applies to interest
dividends, that type of income.
– And what the kiddie tax does
is it taxes children’s
tax at the parents’ rate.
– [Toby] Yes, and someone
just asked that, actually.
I’m looking at your questions,
there’s too many of them coming in,
but one of them says,
hey, if they’re under 18.
No, the kiddie tax only
applies on passive income,
if your kids do work, so
we have an accountant here,
who, when he was out on his own,
had his nine year old working,
and he was paying the nine year old.
As long as they can do something,
there’s no minimum age.
There are tax cases on nine year olds,
by the way, out there, where they win
if you can show that they were doing
something of value and
paying their reasonable wage.