The Tax Benefits Behind Hiring Your Kids in 2011

IRVINE, Calif.  (Profitable.com)  The benefits of being a “family owned and operated” business goes well beyond the sentiment felt by customers. According to Mark Kohler, author of What Your CPA Isn’t Telling You: Life-Changing Tax Strategies (Entrepreneur Press), employing children is one of the most underutilized tax strategies available to small business owners with families.

“Small business owners can save thousands in taxes by hiring their family,” explains Kohler. “Essentially, they can quit paying their children’s expenses and can instead put them on payroll in their business and let the kids pay for their own expenses…saving thousands!”

Kohler offers this benefit breakdown:

First, small business owners who employ their minor children don’t have to withhold any payroll taxes.

Second, all single wage earners, including children, don’t pay taxes on the first $5,800 in 2011 in income because this is the standard deduction. Entrepreneurs with children on the payroll can still claim them on their tax return as a dependent and take the exemption, including the child tax credit.

“The beauty is—kids don’t pay taxes on their earned income on the first $5,800!” Kohler exclaims.

In turn, the business benefits too. Kohler explains, “When you pay your children for services they perform in your business you are able to generate a valid business expense while pushing income to your children.”

In addition to tax deductions gained, parents are surprised at the ancillary benefits such as being able to spend more time with their children and creating love for entrepreneurship.

For those ready to put their children on payroll, here are a few tips:

Create Legitimate Duties

“When brainstorming ideas for hiring children, make sure the jobs you give them are legitimate. It doesn’t have to be an important role, but directly related to the purpose of the business,” says Kohler.

Possible jobs include keeping the books; cleaning the office and maintaining the property; working on the company website; and the like.

Keep a record of what the kids did and a time record in order to withstand an audit.

Follow the Right Procedure

The IRS allows any sole proprietorship or partnership (LLC) wholly owned by a child’s parents to pay wages to children under age 18 without having to withhold the payroll taxes. However, those operating an S or a C-Corporation do not receive this benefit.

The recommendation is to pay children out of a family management company paid a management fee from the Corporation, or out of a Sole-Proprietorship or LLC with independent income and operations.

Mark J. Kohler is the author of What Your CPA Isn’t Telling You and Lawyers are Liars. He is a partner in the accounting firm Kohler & Eyre CPAS, LLP and the law firm Kyler, Kohler, Ostermiller, & Sorensen, LLP, where he specializes in the areas of business, estate and tax planning. www.markjkohler.com .