January 16, 2009
Pay Children a Salary; Not an Allowance!
Your family can become your employees and save you tax dollars even if you are a one-person business.
Your children can earn a paycheck from you rather than you paying them an allowance.
Can a business write off the costs of janitorial service? Of course! Since you have a business based in your home, hire your kids to vacuum, dust and take out the trash.
In 2008 you can pay your children up to $5450 tax free to them and you get to deduct that amount as wages from your income.
The IRS says your child must be at least 6 years old in order to hire them.
And, if they are family members under 18, they are exempt from payroll taxes and the business is not required to withhold or to pay Social Security and Medicare taxes.
In order to audit-proof this aspect of your home-business deductions, use a formal Employment Contract to hire your family members.
The wage-rate has to be “reasonable and customary” within your region of the country and within your industry for the type of work being performed in order to qualify.
You cannot over pay your kids for taking out the trash. You must establish what is “reasonable and customary”. You can do this by getting an outside company to give you a written estimate for the work to be performed, and then pay your family member approximately that amount. Or simply determine what a reasonable person might pay an employee or outside contractor for such services, and pay a similar wage to your family member.
The kids (as employees) have to document what they did to earn the money, so have them fill out a simple “work log” with headings like:
Date they worked Type of work performed Amount of time spent working Hourly rate you paid them
After they turn-in their ‘work log,’ you then pay them by check.
The law requires you to pay them the wage they earned, in order for you to be able to deduct the amount as a business expense. But the law does not restrict how that money is used after it is paid!
In 2008 you can pay your children $5,450 which is equivalent to $104.80 per week.
Who would pay their kids $104.80 per week for their allowance? Maybe you will now when you see why!
So let’s presume you have come up with the tax-free limit of $104.80 per week in home-business related “chores” for them to do. At the end of the week they will turn in their ‘work log’ and you’ll pay them by check.
Open up a separate interest bearing checking account for them to deposit and cash payroll checks. Every week you will deposit their pay check.
When you open a checking account for your child the bank will require it to be a “joint account” since he/she is a minor. Although it’s a joint account only you will be able to make withdraws or write checks on the account since your child is a minor.
Now you tell your child “I will withdraw $20(for example) out of each weeks pay for you to spend any way you wish, however, the other $84.80 will stay in the (interest-bearing) account to be used by you to pay for your________.”
The blank can be filled in with words such as car, wedding, graduation trip or whatever you want.
Did you ever, in your wildest dreams, anticipate that you would be able to pay for school supplies and tennis shoes, or pay for cars, trips and weddings out of pre-tax dollars?
Congressional Law and IRS Code support this. It is 100% true and legal!
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