Would you like to hire a great assistant, while at the same time lower your taxes, save more for the future and make your real estate practice deliver a bigger bang for your entire household?
Then hire the family.
Believe it or not, hiring your children and/or spouse is just fine with the I.R.S. It can provide an incredible opportunity to increase your family wealth by decreasing your income tax bill. But the rules need to be followed carefully. (More on these rules later.)
Are you doubtful about putting the kids on the payroll? Don't be. Children can learn from their parents about responsibility, commitments, and hanging in there when the going gets tough. And if you are able to separate your work life from your home life, bringing a spouse into the business could be better than hiring an unknown job applicant.
Hiring the family makes good business sense for a number of reasons:
Operations: Family members can be a ready source of dedicated, trusted and inexpensive labor to handle much of your administrative tasks. They'll be more inclined to work odd hours, and cheer you on as needed while you are at open houses, listing appointments, and so on.
Payroll: If you're a sole proprietor, or if you and your spouse are the only principals in a partnership or limited liability company, you may save on some federal income taxes. If you hire your children, you are relieved from withholding income taxes and paying payroll taxes (including Social Security) until the child turns 18. Also, you can bypass unemployment taxes until the child turns 21. If you hire your spouse, you can avoid federal unemployment taxes too, but you must withhold federal income tax and pay social security taxes on them. (Corporations are not allowed these tax breaks!)
Shifting Income: Spreading income throughout family members can help move income to a lower tax brackets. This is especially true when hiring your children: a child can earn up to $5,350 -- the standard deduction -- without experiencing a tax liability. Plus, you can deduct the compensation as a business expense. Just make sure the compensation is reasonable for the services provided.
Savings Programs: Once a child earns wages, they can establish an IRA or a Roth IRA, and sock away $4,000 (or as much as they earn if it's less than that) in one of these tax-deferred accounts.
Again, the rules need to be followed carefully, so here's how to do it:
So, let's say I have a child age 13, and I hire him to work for me in my unincorporated real estate business and pay him $9,350 in 2007. Because he's under 18, I pay no Social Security taxes. Nor must I withhold federal income taxes. Because of the standard deduction, in 2007, the first $5,350 earned by him is not taxed.
The next $4,000 could be sheltered by setting up a traditional IRA for my son (although at his age, a nondeductible Roth IRA might be a better long-term account).
The net result is that I have paid my child a total of $9,350 that I can deduct and is tax-free to my son. If I am in the top marginal tax bracket of 35%, I've just saved $3,272 in federal taxes alone.
Nothing here is leading edge or in any way questionable. Assuming that you have appropriate documentation and substantiation for your deduction, the only issue that can raised is the "reasonableness" of the compensation. Just keep good records and don't try to pay a 14-year-old child $50,000 a year to sharpen pencils once a week. The easiest way to flag the taxman is to pay an inordinate amount or pay for a fictitious job or compensate a family member who clearly could not perform the task.
The key is to be very upfront, be very businesslike. And if done with some forethought, it can contribute big time to both your family's financial health and your business's bottom line.
If you have more questions about this, you can send me an e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. .
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
