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Putting your children on the payroll
PUTTING YOUR CHILDREN ON THE PAYROLL
Have you considered putting your children to work
in your business? Of course there's the usual chores,
which are very important. But if you can put your
children to work part time in your business, there will
also be a nice financial payoff.
For instance, you can put your daughter on the
payroll for 10 hours during the week, and six more
hours on the weekend, serving as a messenger, assisting
with incoming phone calls, and doing some landscaping.
If you pay her $7 an hour, she will earn $112 a week,
or $5,600 a year; assuming a two-week unpaid vacation.
The advantage is the salary will be deductible by your
business, in effect eliminating $5,600 of income from
taxation. In addition, you don't lose the exemption
for that child if you continue to supply over half of
her support. (And we are assuming that the child has
no unearned investment income.)
If your child can be claimed as a dependent, no
tax will be due on income under $3,600 (the standard
deduction for a dependent child). If your child cannot
be claimed as a dependent, the $5,900 personal
exemption will apply.
It is important to check your specific situation
with your business accountant, but in general the child
can be claimed as a dependent if under 19, or under 24
and a student. For 1992, any income over the $3,600 or
$5,900 and up to $21,500 would be taxable to your child
at approximately 15%, after which the rate climbs
gradually. Figures may be different for the current
year, because rates could change during the year, but
at these low brackets the actual figures will not vary
by much, and the principle remains the same. Both
employer and employee are liable for Social Security
and state unemployment taxes on the income, under any
circumstances.
If your child's income exceeds the tax free
amount, consider setting up an individual retirement
account (IRA). He or she would be able to contribute
to the IRA and deduct the lesser of $2,000 or the
amount of compensation. By using an IRA, you could
have up to $5,600 or $7,900 of income ($3,600 or $5,900
exempt and $2,000 in an IRA) without any tax.
The child, though, must have real work to do --
she must perform sufficient duties to earn that salary.
Otherwise, the IRS will treat the salary as income to
you and a gift by you to the child.
Check with your attorney or state department of
labor concerning child-labor laws. Commonly there is
an exemption for children employed in a business owned
by the parents if the children's work is not hazardous.
None of this is affected by whether or not you are
eligible to take a home office deduction; it is a
matter of whether the child is actually working for the
business.
Warning: Building up asset's and income in the
child's name (especially in the last two year's of high
school) can sharply reduce eligibility for college
financial aid.
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