A Case For Hiring Your Child

Income Shifting to Children.

Paying wages to a child can be a great way to shift income and reduce taxes. Many people don’t pursue this option due to misunderstanding the “Kiddie Tax” rules; however, the “Kiddie Tax” only applies to investment income, not earned income such as wages from employment. The wages paid to a child are deductible if the following criteria have been met: 

  • The wages are paid for work performed that is related to the parent’s trade, or business. 
  • The child must actually perform the services. 
  • The wages are actually paid out to the child. 
  • The compensation being paid must be reasonable for the services being performed.

What are the advantages of doing so?  First of all, the income paid to your child is either taxed at your child’s lower tax rate, or escapes taxation completely if the total amount paid for the year is less than the child’s standard deduction ($6,300 for 2015).  Now that the child has earned income, he/ she can make contributions to a retirement plan. This is a great way for you to jump start retirement savings for your child.  And of course you get the deduction at the business level for the amounts paid to your child. You have shifted the income from your higher tax bracket to their lower bracket.

What are the advantages of doing so?

  • First of all, the income paid to your child is either taxed at your child’s lower tax rate, or escapes taxation completely if the total amount paid for the year is less than the child’s standard deduction ($6,300 for 2015).
  • Now that the child has earned income, he/she can make contributions to a retirement plan. This is a great way for you to jump start retirement savings for your child.
  • And of course, you get the deduction at the business level for the amounts paid to your child. You have shifted the income from your higher tax bracket to their lower bracket.

For more information about this and other tax savings strategies please call our office in Williston (802) 878-1963 or Rutland (802) 775-7132 Vermont.

 

Similar Posts