Why Hiring Your Kids Is a Great Idea for You and for Them
The end of the school year is coming to a close. What plans do you have for your kids this summer? We have an idea for you. Your kids may not like it, but you will!
This summer, consider hiring your kids to help you with your business. Under the new tax reform laws, starting in 2018, the single taxpayer standard deduction increased from $6,350 to $12,000. This means you can pay your kids up to $12,000 and they will pay no federal or state income taxes.
This is what we call an income-shifting strategy, where you shift your income from your higher tax bracket to your kids' 0-percent tax bracket. That is tax efficiency, which leaves more money for your family and less for the government.
You might ask yourself, "What can my kids do for my business?" In the past, kids often did office cleaning and filing. But nowadays, your tech and social media-savvy kid can do so much more for you. This is great because you can pay them at much higher rate. They can help with social media, marketing, your server, and other technologies. This frees up your time up so you can focus on revenue-generating tasks.
3 Things to Consider before Hiring Your Kids
If you do consider hiring your kid, here are a few things to be aware of.
1. You must pay your kids a W-2 wage. Under the IRS’s family attribution rules, your kids are your employees. You cannot deem them to be independent contractors.
2. Your kids’ wages must be reasonable. “Reasonable” is what you would pay someone else to perform the same functions.
3. Document the hours your kids work and the duties they perform. Hiring your kids is a great tax strategy, and the IRS knows this. The IRS wants to make sure your kid’s employment is legitimate and that you pay your kids a reasonable wage.
Tax Savings and College Savings
Let's take this discussion to another level and outline a great college savings plan. Hiring your kid shifts money from your high-income tax bracket to their 0-percent bracket. Your kid can use their wages to fund a Roth IRA. Your kid can put $5,500 into a Roth IRA each year (assuming their wages are $5,500 or more). It gives you these advantages:
First, the money grows tax-free and is not subject to the kiddie tax. The kiddie tax is when your kids—dependents under age 24—have unearned income (interest, dividends, capital gains). If they have enough unearned income, the kids will pay tax at your highest tax rate. We certainly don't want that to happen!
Second, the amount in your kid’s Roth IRA doesn't count as an asset when you apply for financial aid. It's considered a retirement asset. Therefore, it doesn't count against you as you fill out your FAFSA form. This is a significant advantage over a traditional savings plan, brokerage account, or using a 529 college savings plan.
Third, Roth IRA contributions can be withdrawn and used for higher education costs. Remember, you or your kids do not get a deduction when you contribute to a Roth IRA. But under the distribution rules, taxpayers are allowed to withdraw their Roth IRA contributions FIRST, which are tax-free. This is a great plan for higher-income people who most likely won't qualify for any financial aid.
So, hiring your kids can be a great way to save on taxes now and fund your kid’s higher education. Take their wages, put them into a Roth IRA, let that money grow tax-free, withdraw the money later on for higher education expenses.
One more recommendation if you have kids age 21 or older. If your older kids are in their final years of college and are continuing their education to earn higher degree, consider having your company hire those kids and setting up a tax-free educational assistance program. It’s another way for you to save money and help your kids fund their education.
Want to take advantage of these tax strategies? Contact Kaiser Tax today for expert help setting up a strategy that works for your kids and your business.