As a CFP® Professional and all-around fan of smart financial strategies, I'm always thinking through how business owners can reduce their tax bill and grow their wealth. Here is a simple, yet impactful strategy that can help you save on taxes while benefiting your family:
Employing Your Children In Your Business.
Here's how it works
Hiring Your Kids:
If you own a business and have children, consider employing them. You can pay your children up to $13,850 per year, which is equivalent to the standard deduction for single taxpayers.
Tax Deduction
The beauty of this strategy lies in the fact that your business gets a tax
deduction for the payments you make to your children. This effectively lowers your taxable income and reduces your tax liability.
Tax Benefits for Your Children
While your kids will need to file a tax return, they can claim
the standard deduction, making their taxable income zero dollars!
IRA Contributions
Take it a step further by combining this strategy with an Individual
Retirement Account (IRA) for your children. If they contribute a portion of their earnings to an IRA, that amount is deductible, leading to even more tax savings.
The Fine Print
This strategy works best with parents hiring their kids, not extended family
members such as aunts and uncles. Also, it’s best used when the business is structured as either a Single Member LLC, Sole Proprietorship, or Partnership, though there can be workarounds for corporations.
Here’s what this looks like in reality
A client at our firm implemented this strategy last year when she hired her kids to work at her practice doing some document shredding and office work. She then started an IRA for her kids, who have earned income, and had them research their own stocks to begin investing.
This became a family project that allowed the owner to work alongside her children, teaching them about the business. It also allowed her to shield income from taxation, save money for the children’s future, and to teach them about investing!
Why is this strategy worth considering?
It instills financial discipline and encourages savings at a young age.
It strengthens the family bond by involving your children in the family business.
It's a tax-efficient way to transfer and build wealth for your children.
It fosters a strong work ethic and provides a sense of responsibility.
Remember that the key to financial success is making fully informed decisions that align with your personal goals and circumstances. If you're a business owner with children, this strategy may offer significant benefits. Feel free to reach out if you have questions or need guidance on how to implement it effectively. Let's work together to maximize your financial well-being!
The information provided in this blog is for educational purposes only and is not intended as tax,
financial, or legal advice. While we strive to provide accurate and up-to-date information, tax
laws and regulations are complex and subject to change. Therefore, before implementing any
tax strategy or making tax-related decisions, it is crucial to consult with a qualified tax
professional who can provide advice tailored to your individual circumstances. This above
content does not substitute for professional tax advice and should not be used as the sole basis
for any financial decisions.