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Show Save taess Mire jom kids By KENNETH J. ROSE Editor's Note: "Boltom Line" author Kenneth J. Rose is the owner of Rose & Associutes, a small business tax consulting, consult-ing, and financial planning firm in Bountiful. He is on the Utah District Advisory Council of the U.S. Small Business Busi-ness Administration and the Governor's Small Business Advisory Council. His office is at 465 S. 200 W. Suite 1 B, Bountiful, Boun-tiful, 298-8666. His articles are a regular feature of the Davis County Clipper. With summer upon us and school almost out, when "hanging out" wears thin and your children are looking for something to do during their vacation from school, there's a simple solution that could save you in tax dollars put them on the payroll. Hiring dependent children has long been a tax-saving technique used by the smart business owner and now with higher self-employment self-employment tax rates, this move makes more sense than ever. Along with the self-employment tax rate rising from 12.3 percent in 1987 to 13.02 percent in 1988, the wage base on which the self-employment self-employment taxes are assessed has increased to $45,(XXJ. If you are a self-employed business owner who needs summer help, hiring your own children can save both income taxes and self-employment taxes. This option will become even more attractive as the self-employment rates and wage bases increase more over the next several years. This reaps several significant benefits be-nefits for you. First your child is compensated with your pre-tax dollars; the total amount paid is fully ful-ly deductible as a business expense on your personal tax return. Next, wages paid to children under the aee of 16 are exempt from FICA, FUTA and State Unemployment Taxes. If your child is unmarried, has unearned income less than $1,000 and earned income less than the minimum filing requirements, have him or her fill out a form W-4 claiming claim-ing exemption from federal withholding with-holding as well. And if you provide more than 50 percent of your child's support you can claim him or her as a dependent on your own tax return provided he or she is under age 19 or a full-time student. The tax savings are significant. For example, suppose you pay your child $3,000 over the year and your net business profit is less than $45,000. The savings in self-employment self-employment taxes alone would be $391! If you are in the 28 percent tax bracket, the savings in your income in-come taxes would be another $840. There is a warning here, however. howev-er. Since the IRS watches this type of deduction closely, it is important that a legitimate employer-employee employer-employee relationship exists between be-tween you and your children working work-ing in your business. The most im portant thing to evidence this relationship re-lationship is a clear record of the hours worked and that the pay rate be commensurate with wages paid to others who are not members of the family for the same type of work performed. Taxes aren't the only benefits you reap from employing your children chil-dren in your business. Your children chil-dren have the chance to learn how to manage their own money. You can save money by having them now buy their own clothes and pay for some of their fees and other expenses for school. These still usually won't be enough to disqualify disqual-ify them as your dependents. So don't overlook the advantages advan-tages of hiring your children this summer. They will get some important impor-tant learning experiences and you will enjoy the tax breaks! Again, if you have questions about this technique, tech-nique, consult your tax advisor or business counselor. |