Profit from Paying Your Kids

August 2001
by Julian Block

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Can your children help out with some of the chores connected with your business? Then a savvy way to take care of their allowances or spending money–at the expense of the Internal Revenue Service–is to pay them wages for the work they do.

Going that route is not just a strategy to save taxes for the family as a unit. It provides your children with jobs that put some “jingle in their jeans,” familiarizes them with the business, and instills a bit of the old work ethic. Here are several strategies to keep in mind when your business pays them compensation that it deducts and they report on their returns.

 

Staying Clear of “Kiddie Taxes”

Putting your children on the payroll is a perfectly legal way to keep income in the family, but shift some out of your higher tax bracket and into their lower bracket. This maneuver is not crimped by “kiddie tax” rules that curtail the ability of parents to shelter investment income by gifts to their children of cash, stocks, and other income-generating assets.

Under these rules, dividends, interest, capital gains, and other kinds of investment income received by a child 14 or older get dunned for taxes at the child’s, not the parent’s, rate. However this sort of income received by a child under the age of 14 is generally taxed at the parent’s top rate when it exceeds a specified figure ($1,500 for 2003), which is indexed–t…IBPA Members – Click here to view the full article (login required).

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