Pay Children A Salary; Not An Allowance!

Pay Children a Salary; Not an Allowance!

by

K. Russell

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. Even home based businesses are allowed to write off (deduct) janitorial services. If you have a home based business hire your children to dust, vacuum 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. A limitation is that they must be at least 6 years of age. 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. Establishing what is “reasonable and customary” can be as easy as getting an outside company to give you an estimate of what they would charge for the same service and paying your family member a similar wage. 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 Once they have filled in their ‘work log’ you pay them by check. In order for you to deduct the wages your children earn as a business expense the law requires that you actually pay them but the law does not restrict how that money is used after it’s 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! OK, you and your children have come up with home-business related “chores” for them to do equaling $104.80 per week. They turn in their ‘work log’ and you pay them by check. Now it’s time to open up an interest bearing checking account for your child in order to deposit and cash payroll checks. Deposit their paycheck every week. 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. Then you tell your child, “I will withdraw $10 (for example) out of each weeks pay for you to spend any way you wish, however, the other $94.80 will stay in the (interest-bearing) account to be used by you to pay for your________.” Fill in the blank with words like car, graduation trip, wedding, or whatever you like. Using pre-tax dollars for school supplies and tennis shoes, or pay for cars, trips and weddings saves money out of your budget for such things. Unbelievable! Its true! Its real! And its 100% legal!

Karin has owned a home business specializing in tax preparation for home based businesses for 36 years. Her web site:

Home Business Owners-Reap the Rewards

offers more income tax for home business owners. She highly recommends the book

‘It’s How Much You KEEP, That Counts! Not how much you Make’

for all her clients.

Article Source:

Pay Children a Salary; Not an Allowance!