Family Businesses Offer Tax Incentives

Author: Jenny Shilling

Family businesses come with a lot of advantages. In addition to providing unique marketing opportunities and fostering a sense of responsibility in your children, it also makes good business sense. The key is to hire your kids while they are young; they learn some valuable lessons, and you get a tax break.

That's right, you get a tax break for hiring your own children. Here's what you need to know:

• Your business must be unincorporated, which means entities such as sole proprietorships, partnerships and LLCs are eligible.
• Your child must be under the age of 18.
• The job they do must benefit the business. Basically, they can do any task that you would pay another person to do, whether it's packing shipments, running errands or cleaning the floors.
• You must pay them a reasonable wage for the tasks they perform and this wage must be consistent with what you would pay somebody else. Paying excess wages for menial tasks is not a good idea.
• You should pay your child regularly, just as you would any other employee. Paying them a lump sum at the end of the year raises a red flag with the IRS.

The reason that hiring your children makes such good business sense is that you gain the following tax benefits:

• You can pay up to $5,950 with no tax liability for either of you.
• You can deduct these wages as a legitimate business expense.
• Your child can fund an IRA and increase their earning potential for the year. In addition to building their retirement savings, they will be able to earn an additional $3,000 beyond the $5,950 limit.

It is important to know that your child will likely have to have federal income taxes withheld, but they will get it back after filing their tax return for the year. Work with a qualified tax professional to make sure you follow all the rules and make the most of this benefit.

The Tax Office Inc. can help you identify other sources of tax savings for your business. Put our business sense to work for you; contact us today to schedule a meeting.