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Secret Tax Hack: How Hiring Your Kids Can Save You Thousands!
Consider hiring your children for tax benefits. Learn how to navigate the legal and financial aspects, ensuring a fair and strategic approach. Explore the advantages across different business types.
Building the right tech stack is key
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How to choose the right tech stack for your company?
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What to consider when choosing the right tech stack?
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What are the most relevant factors to consider?
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What tech stack do we use at Simpletech?
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In the maze of tax planning, there's an oft-overlooked strategy which offers benefits for both business owners and their children: hiring them. Here’s a deep dive into why and how you should consider this approach for your own business.
1. Tax Advantages: No Withholding for Minors
When operating as a sole proprietorship, partnership, or an LLC wholly owned by the child's parents, the IRS grants you a unique advantage. You can employ your children under 18 without the burden of withholding payroll taxes. Instead of regular payroll, their earnings are designated as "outside labor". This not only simplifies your payroll process but also sidesteps the need for issuing a W-2 form, thanks to no withholding requirements.
However, a word to the wise: if your goal is to have your child contribute to a Roth IRA, it's worth issuing a W-2. This bridges the gap for the IRS, linking the child's IRA contribution with their earned wages.
2. Fairness and Suitability in Compensation
Diving into this strategy requires fair play and forethought:
Reasonable Compensation: This isn't about giving your child a fat paycheck. It's about reasonable compensation. What would you pay someone unrelated for the same task? That's your benchmark.
Job Suitability: Think about the tasks. Light chores such as office tidying, data entry, or basic bookkeeping? Perfectly suitable for youngsters. On the flip side, fields with potential hazards should be off-limits.
3. Navigating the Waters of Child Labor Laws
Federal Perspective: By and large, kids can work for businesses that their parents own outright.
State-Specific Nuances: Tread carefully here. Every state has its own rules. Taking New York as an example, it has a set of distinct regulations about youth employment.
4. Different Strokes for Different Business Types
For those navigating the waters of S or C-Corporations, there's a wrinkle. The benefit of avoiding FICA for minors isn't on the table. But there's a workaround: creating a sole proprietor 'management company'. It becomes the conduit for your child’s wages.
A Glimpse into State Filings
Using New York as our lens once again, minors (those under 21) have a unique perk: they're exempt from state income. And if they're dependents on another's federal return? There's a standard deduction, pegged at $3,100 for 2022.
In Conclusion,
Bringing your children onboard isn't just about teaching them the ropes of the business world. It's also a legitimate, strategic move that, when done right, can have tangible financial benefits. And as always, Ledge Accounting is here to guide you every step of the way.
If you’d like to explore the benefits of having your accounting needs handled – all for an affordable, flat monthly rate – let’s set up a free consultation and see how Ledge Accounting can help. We’re a turnkey provider of accounting, bookkeeping, and tax services that operates exclusively in the franchising industry. There are no contracts, and no hidden fees. With personalized, one-on-one service, our qualified CPAs can handle all your accounting needs and provide you with accurate monthly statements – reconciled down to the last cent. To find out why more than 550+ franchise owners trust Ledge Accounting, select a convenient time and book a free consult on our calendar or email us at: contact@ledgeaccounting.com.
For more information, we invite you to visit our website at www.ledgeaccounting.com.
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