Learn How to Minimize Your Family's Tax Burden

Parents: Did you know that you can hire your kids in your small business and reduce your taxes?

If you own your own business, one of the greatest tax saving strategies you have available to you is the ability to hire your children. Here are a few ways that hiring your kids can save you in taxes:

1. You get a tax deduction for the wages you pay your kids, which reduces your taxable income

2. By paying your children, you are effectively transfering income from your higher tax bracket to your childrens' lower tax bracket

3. Business expenses - including wages paid to your kids - reduce your business income, which in turn reduces your self employment tax

4. Your kids may not owe any tax on the amount you pay them, depending on how much they earn and whether you claim them as a dependent or not (in 2009, dependent children can earn up to $5,450 before they will owe any income tax)

5. Kids who have earned income can open a Roth or Traditional IRA, giving them a jump start on their retirement savings

You might also want to consider this strategy if your children have their own business. Instead of the kids owning the business, you could minimize your family's total tax liability by having the parents own the business and hiring the kids and paying them a wage.

Why would it matter who owns the business? Well, if you are self employed, you have to pay self employment tax on your net earning over $400. This rule applies to both adults and children, so there is no advantage to being a kid when you're self employed. However, kids have a huge advantage if they earn wages paid from an employer. Why? Well, kids don't have to pay taxes on the first $5,450 of earned income, even if they are claimed as a dependent on their parents' tax return.

Here's an example:

Let's assume Teddy, how is 14 years old, has a web design business. In 2009, he expects to earn $5,000 from this business after all of his expenses.

If Teddy is the owner, he is considered self employed and he will have to pay 15.3% in self employment tax on this income. Assuming this is his only income, he won't owe any federal income tax because his total earnings are less than the standard deduction amount ($5,700 in 2009), but he will still have to pay self employment tax on the net profit. Teddy's total tax in this example will be $765.

Now let's assume that Teddy's dad is the owner of the business and he hires Teddy to do the work. Teddy still earns $5,000, but he is his dad's employee instead of being self employed, therefore he doesn't have to pay self employment tax. Teddy's dad will report the $5,000 in income on his tax return, but he gets to deduct the $5,000 he pays Teddy to work in the business, so dad won't owe any tax on this income. In addition, because Teddy is under 18, Teddy's dad doesn't have to pay payroll taxes on him. Finally, because Teddy earned less than the standard deduction, his total tax liability will be zero.

In this example, the family's total tax savings by having the business in the father's name and having the child as an employee instead of the owner is $765.

Parents: want to learn how to minimize your family's taxes? If you have a small business, or if your child has their own business, you'll want to learn how to hire your children to help minimize your family's tax burden.