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Hire your children to save taxes for your business and your family

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It can be difficult in the current job market for students and recent graduates to find summer or full-time employment. If you’re a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.

Shifting income

By moving some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the salary as a business expense, the work done by the child must be legitimate, and the child’s wages must be reasonable.

Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.

The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the extra income from tax by making a tax-deductible contribution to his own IRA.

Family taxes will be cut even if the employee child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Saving employment taxes

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.

If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.

Proposed bill would freeze IRS funding at 2016 level

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After the passage of a Continuing Resolution on April 28 that funds the government for an additional week, Congress has turned its attention to the Consolidated Appropriations Act of 2017, which would fund the government through the fiscal year. The bill provides $11.2 billion for the IRS — freezing agency funding at the fiscal year 2016 enacted level. Among other IRS-related prohibitions, the bill forbids proposed regs related to political activities and the tax-exempt status of Sec. 501(c)(4) organizations.

Tax deadlines loom

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March 31 is the deadline for employers, businesses and others to file certain information returns with the IRS electronically. Forms with a March 31 deadline include W-2G (Certain Gambling Winnings), 1096 (Annual Summary and Transmittal of U.S. Information Returns), 1098 (Mortgage Interest Statement), 1098-T (Tuition Statement), 1099 (except 1099-MISC for nonemployee compensation), 3921 (Exercise of an Incentive Stock Option Under Section 422(b)), and 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips)

When will Congress start discussing changes to the tax code?

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House Speaker Paul Ryan (R-WI) has said he wants to tackle tax reform in the spring, after health care reform and the spring budget pass. Senate Majority Leader Mitch McConnell (R-KY) has stated tax reform will likely occur later than that. While health care reform is proceeding rapidly, with the release of the American Health Care Act on March 6 and approval by House committees, the projected mid-April passage of the bill may be in doubt due to opposition by Democrats and some conservative Republicans.