by TonyLiberty
By doing this, you can legally reduce your taxable income by $13,850 and avoid paying tax on that amount, plus your child will owe $0 taxes on that amount, and you can also invest $6,500 of that in a tax-free Roth IRA. (When you employ your children it’s s a business expense and business expenses are tax-deductible).
To avoid self-employment tax (15.3%), you can put your child on payroll and issue a W-2, then use the standard deduction to reduce their taxable income. (Children under 18 who work for a business owned by their parents are also exempt from paying Social Security and Medicare taxes).
You need to pay your children a reasonable wage for the work they do, and they have to perform an actual task (so create a contract detailing the responsibilities). Children can perform tasks such as administrative work, social media management, or other age-appropriate responsibilities (and make sure you track the hours worked).
Your child has to be paid an age-appropriate reasonable wage. For example, it’s considered tax evasion if you pay a 1-year-old child $13,850 per year to do your accounting.
When you pay your child for their work it’s considered a business expense and you can deduct it from your taxable income, lowering your tax liability.
This strategy not only benefits you but also helps your child start their retirement savings early. You can make your child a millionaire by opening a custodial Roth IRA. By investing $6,500 in an S&P 500 index fund, it can grow tax-free. Here is an example:
• Invest $11 a day into an S&P 500 index fund
• Let compound interest do all the work
• In 30 years should have $1,002,208, tax-free (historically, the S&P 500 has earned 11% per year, on average, over the last 96 years)
Based on an 11% average historical return, here is the power of compound interest and maxing out a Roth IRA:
• 10 Years: $117,369
• 20 Years: $433,591
• 30 Years: $1,331,479
• 40 Years: $3,880,962
• 50 Years: $11,120,016
Because Roth IRAs offer tax-free growth, your investments can compound and grow faster. With a ROTH IRA, you can withdraw your contributions at any time.
Hiring your children for your business (or side hustle) and investing their salary in a tax-free Roth IRA is a great strategy to save you money on taxes, help your child build wealth, and teach your child valuable skills. Your children will learn about budgeting, saving, and investing, all while earning money for themselves. Please remember:
• Track the hours worked
• Your child has to perform an actual task
• Check your state requirements for age
• Create a contract detailing the responsibilities
• Your child has to be paid an age-appropriate reasonable wage
Taxes are your biggest expense in life so strategic tax planning is a must.
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