Employ Your Children

Hire your kids instead of paying them an allowance!

It is quite common to see children actively involved in the family

business. Even young children can perform valuable services. Many

business owners, however, miss out on the major tax savings generated

by actually hiring their children and paying them a fair wage for their

services.

The expense is tax-deductible to you, and the income is tax-free to them.

[Reg Sec 1.162-7(a) ] The tax-free limit for dependent children was

$5,350 per child per year for 2007, and it tends to be increased

somewhat each year. The amount is equal to the Standard Deduction.

[Rev. Proc. 95-53 and IRC Section § 63(h)(2) ]

In order to qualify, the wages must be reasonable in amount, based on

services actually rendered and documented as paid. Children as young

as seven years old have been found to qualify as employees of the

parents' business. [Reference Eller v. Commissioner, 77 T.C. 934 (1981)

]

And if they are family members under 18 working for a sole

proprietorship, they are exempt from payroll taxes [IRC Section §

3121(b)(3)(A) and § 3306(c)(5) ] and the business is not required to

withhold or to pay Social Security and Medicare taxes. [Tax Court Ruling

48 TC 439, 450 (196) in the case of Denman v. IRS Commissioner]

For incorporated business owners, your corporation will have to pay

payroll tax and you do need to withhold social security/medicare from the

children's wages, but the benefits are still well worth it.

In order to qualify, the wage rate has to be "reasonable and customary"

within your region of the country and within your industry for the type of

work being performed. These wages must be paid and the appropriate

payroll tax returns and W-2 forms filed with the IRS and Social Security

Administration. Before hiring your children, check with your tax pro to be

sure your documentation and reporting will follow the rules. [Revenue

Ruling 73-393]

The kids (as employees) should document what they did to earn the

money, [Revenue Ruling 73-393] so have them fill out a simple "work

log" with headings like:

o Date they worked

o Type of work performed

o Amount of time spent working

o Hourly rate you paid them

** Pay Attention Here **

We're about to show you how to pay for...

o The car your high-schooler wants

o Designer-label clothes the kids demand

o Movie and Concert tickets

o A High School graduation trip

o College tuition, books and supplies

o Your daughter's expensive wedding

o And lots of other personal out-of-pocket expenses

ALL in PRE-TAX Dollars!

Here's how you can do this...

The tax-deductible $5,350/year Uncle Sam lets you pay your children as

employees, is equivalent to about $100.00 per week! But, you say, "Who

gives their kids a $100.00 per week allowance?" YOU might now! And

here's why...

Let's say you come up with the tax-free limit of about $100.00 per week

worth of business related "chores" for them to do. After they turn in their

"work log", you then pay them by check. So, you'll have to open a

separate checking account for them to deposit and cash payroll checks.

Of course, you will deposit every week's $100.00 paycheck into that

account. Make sure it's an interest-bearing account. (You will see why in

a minute.)

The bank will require it to be a "joint account" with you, since they are

minors. Although it is technically a "joint" account, only you will be

authorized to make withdrawals or to write checks on that account, since

the child is a minor.

Reader Alert! Here is Where It Gets REALLY Interesting...

The law requires you to pay them the wage they earned, in order for you

to be able to deduct the amount as a business expense.

These funds can now be used in a variety of ways so long as they are

for the benefit of your child. The only other specific restriction is that this

money cannot be used for your child's lodging or meals. [Rev. Rule 73-

393]

So, you simply tell your child, "I will withdraw $10 (for example) out of

each week's pay for you to spend any way you wish, however, the other

$90.00 will stay in the (interest-bearing) account to be used by you to

pay for your________."

Fill in the blank with words like car, graduation trip, wedding, or whatever

you like.

Did you ever, in your wildest dreams, anticipate that you would be able

to pay for school supplies and tennis shoes, or pay for cars, trips, and

weddings out of pre-tax dollars? It's true! It's real! And it's 100% legal!

There's another practical benefit to this strategy that is at least as

important as the tax benefits. Your child/children will begin learning the

value of a dollar. Imagine being at the mall to buy a new pair of shoes.

The child has to decide whether he or she wants the $150 designer-label

brand or the $45 generic brand - knowing that whatever they have left in

their checking/savings account will be theirs someday, to pay for their

car, trip, college, wedding, etc.

Isn't that a great tax-savings strategy and a great learning opportunity for

your children?

Next - Hire Your SPOUSE, So You Can Write Off Medical "Out-of-

Pocket" Expenses for YOURSELF!

This applies to sole proprietor entities only. When your spouse is an

employee of your home-business, he/she is eligible for "benefits" from

his/her employer (that's you), and those benefits are deductible as

business expenses. [IRC Section § 162(a)]

So you establish this benefit as company policy: Any and all employees

and their family members (again, that includes YOU) will be reimbursed

(by the home-business) for all medical-related expenses not covered

under any other insurance plan he/she may have under another

employer.

"Any and all employees" means your spouse and your children, "and all

members of their family" includes YOU.

A Word of Caution: Only establish this company policy if your business

will be hiring only your own family members. If you establish this policy

and then hire non-family members, you will be required to offer this

benefit to them as well, and that could defeat the purpose.

So What Just Happened?

You just set into place a strategy for legally tax-deducting all annual

insurance plan deductibles, co-pays for doctor visits, prescription drugs,

and non-covered expenses like braces, glasses, contact lenses, dental

work, and possibly even cosmetic surgery. [Reg Sec 71-588; Plr.

9409006]

No minimum thresholds apply; every single dollar is tax-deductible by

the business as an employee benefit cost.

It is important that this "policy" be established in writing, as a legal

document and that the benefit is reasonable in relation to the level of

services provided by the employee to your business. In Appendix C to

this system you will find a sample fill-in-the-blanks "Self-Insured Medical

Reimbursement Plan", which you may feel free to adopt or adapt, if you

wish. [Reg Sec 1.105-5(a)]

A Word About the Level of Your Spouse's Wages

A sole practitioner (Schedule C taxpayer) is not required to pay

Unemployment Taxes on the employment of a spouse; however the

business is required to pay Social Security and Medicare payroll taxes

on adult family-member employees.

Since those taxes are calculated based on a percentage of the

employee's wages, the lower the wage level, the lower the payroll taxes

will be. Even if you employ your spouse at "minimum wage", you qualify

to use this medical expense reimbursement tax strategy, so long as this

benefit is reasonable in relation to the level of services provided by your

spouse. [IRC Section § 3306(c)(5); IRS Publication 15, and IRS Circular

E all apply]

Scott C Turner, CPA Mission, Path and Today's Focus

Life Mission: His mission has always been to find a better, more

affordable method for the average to above-average smaller business

owner to successfully access a higher level of tax strategy service that

formerly could only have been obtained by the wealthier and more-

informed business owner.

The Path: He was aggressively recruited upon graduation in 1978 by

each of the "Big-8" accounting firms. He accepted an offer from Main

LaFrentz, the ninth largest CPA firm worldwide at the time, an affiliate of

KPMG, the largest international accounting firm, where he immediately

specialized in small business taxation - a specialty in which he has

remained focused to this day.

Scott Turner is the former Director of Tax Consultation Services for the

nation's second largest employee benefits provider, serving more than

10 million taxpayers. This service provided an in-depth view of individual

and business questions faced by today's smaller business owners.

Today's Focus: Use the latest technological advances to relieve

business owners in reporting their financial and tax data, to establish

their best legal tax position, to implement the most updated and

appropriate tax strategies, and to provide for them the information they

need for management decisions.

He currently manages his firm in the SF Bay Area having represented

thousands of small business clients; while staying focused on his

specialty for over 25 years - Strategizing for Small Business to achieve

their best overall tax results. Though the majority of the clientele he has

served consists of average to above-average smaller business owners,

other notables include several highly successful health professionals,

multi-millionaire real estate investors, authors, and highly-regarded

Silicon Valley business consultants.