If you are a sole proprietor and have kids under 18, you can hire the kids and save on both income tax and self employment tax! You can pay them up to $5,950 in 2012 (more in 2013) and save. You will not owe social security, medicare, unemployment taxes (plus your state taxes) on the wages you pay them. Plus your kids can take the standard deduction of $5,950 and not owe any income taxes. Let’s say you are in the 25% income tax bracket with the IRS, hiring someone else at $400 a month would cost you social security and medicare tax in 2013 of $734.40 and unemployment tax of $28.80, so you save federal payroll tax of $763.20, plus you save federal income taxes of $1200.00. Because your child uses the standard deduction and does pay income tax on the money, you just saved nearly $2000 in taxes.
If you pay an additional $200 per month for the kid, you would save another $380 in payroll tax and save $475.00 in income taxes (you save $600, your child owes $125 on their return because they are in the 10% bracket). If you have more than one child, out them all to work! Remember that the wages:
- Have to be reasonable.
- Have to be for work actually performed.
- Are the property of the child (so give them an allowance – they are always asking you for money anyway).
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