Small Business Tax Benefit

May 4, 2015
Small Business Tax Benefit
Dan Backus
  • Are you tired of giving your kids allowance for little to no housework?
  • Need a way to lower taxes on your business?

Fortunately, Congress put has a law in place that benefits the small business owner that will ease both of those concerns.  As a business owner you can save on income and payroll taxes by putting your age appropriate children on payroll.  The biggest benefit can come from children under 18 years old as would be exempt from some payroll tax coverage while further reducing your taxable business profit while keeping the money inside the family.

As an example, James and Stacy Smith own an ice cream shop that has higher activity during the summer months.  They hired their 15 and 16 year old children to stock supplies, clean up, and serve customers for four hours each day through summer break.  While paying a wage of $10/hour, a total of $3,400 each would be earned and not subject to the same payroll deduction that would occur when working at another job.  This would save $1,904 in federal income tax at the 28% bracket and $1,040 from business profits subject to self-employment taxes.  Even more can be saved if they going into a higher tax bracket or have their children work more hours. 

Income shifting will allow you to transfer income, through wages, down to the lower tax bracket of your child.  Even if you have a child in college that would be subject to Medicare and Social Security, their first $9,225 of income would be taxed at 15%.  This is an immediate drop from tax rates ranging from 25% to 39.6% that small business are affected by.

Individual Retirement Account (IRA) funding is a common use for the extra money earned by the children.  A fully funded Traditional IRA would allow each child to earn $11,800 before any is subject to federal income taxes.  A Roth IRA is a perfect tool when trying to save money for college as it is not reported on your financial aid forms under after distributed.  There is no penalty for withdrawing from your Roth IRA for qualified higher education expenses.

Business filing method does matter when determining whether this could be used by your company.  Any entity that reports business profits on Schedule C of your personal tax return would be eligible and a partnership owned completely by spouses.  A family business run as a Corporation or an S-Corporation is not afforded the same treatment of family members and would be subject to all payroll taxes, but with planning there are other possibilities.

Work ethics and money management skills are important lessons for your child to learn early on in life.  What better way to ensure these are developed before they go off to college? Have them work for you.

Give us a call to help determine how this planning tool can help save you money and keep the kids busy during the summer break.  We can provide more guidance on the restrictions based on your circumstances.