In certain situations, the advantages of having kids pitch in with the family business can go further than just busing tables or running errands. There are also tax benefits to putting family members on your payroll.
For many, the family business is an endeavor that, true to its name, the whole family pitches in on. Often a multigenerational affair, mom and dad typically run the show while the kids offer helping hands wherever they’re needed. But what shouldn’t be overlooked is the fact that there are numerous ways working children can provide tax advantages.
Here are three ways adding family members to your payroll can be a tax benefit.
Turning high-taxed income into tax-free or low-taxed income
The principle here is fairly straightforward: In situations where a parent/business-owner operates in a higher tax bracket, they can reallocate a portion of their income — which would have been taxed at a higher rate — to their legitimately employed child as compensation, and that child would then be taxed at a lower rate.
Of course there are stipulations involved, but in circumstances where this might work, it could save the parent substantially on their own income taxes, while possibly absolving the child of any tax liability — so long as they haven’t earned too much.
Social security savings
This benefit is typically reserved for family businesses operating as “sole proprietorships.” A parent filing taxes using this self-employment status can save on taxes by shifting some of their earnings — as compensation for work — to their child under certain ages.
By transferring self-employment dollars to his/her child, a business owner would decrease their own taxable income — as explained above — while saving money on the social security front if the child is under 18 years old, as well as on unemployment taxes if the child is under 21 years old.
Your business may also be able to provide your child with retirement benefits, depending on the type of plan your business has and how it defines qualifying employees. This could help ensure a level of well-being to your child over the long-run, while also providing a more favorable tax scenario to you in the here and now.
If you manage a family business and you want to be sure you’re making the most of your tax possibilities, we’d love to help you achieve that goal.
Kevin Rose, CPA and CFP, is a founding partner at Market Street Partners, PLLC, an accounting firm headquartered in Chattanooga, Tennessee. He can be reached at [email protected].