Save on Taxes By Putting Your Kids on the Payroll

Save on Taxes By Putting Your Kids on the Payroll

Today I am going to talk to you about how to limit your tax liability as a small business owner, but more specifically, how to utilize your kids to do that. We all joke about kids being expensive, but here is a way that we can use that cost to our advantage as a small business owner.

One of the questions I have been asked many times over the years, can I add my kids to payroll, and then take a deduction for that? If so, how should I go about doing that? Before 2018, the answer was yes, and it still is yes. Before 2018, a dependent child (a child who is your dependent) could earn, up to approximately $6300 of earned income before they had to pay any income tax.

However now, the rule has changed. A dependent child can earn up to the standard deduction amount in earned income before they have to pay any income tax. The way you calculate that is you say the total earned income plus $350 with a maximum of $12000. The tax on that could be as high as $4000, $5000, depending on where your bracket falls, because these deductions for their payroll are coming right off of the taxable income for your business.

Another thing to consider, after you add your child to payroll and you pay them that $12000 gross salary, or gross wages (of course you still have to deduct the FICA, the Medicare, and the social security tax), you can put the remaining money into an account for a child, and use that to pay for some of those expenses that would otherwise not be deductible to you. Expenses such as school tuition, healthcare costs, clothes...you name it, the list goes on and on.

As you can see, it can be extremely beneficial to consider adding your kids to the payroll in your small business. I advise you to ask your CPA whether or not you should add your kids to your small business payroll, and talk with your CPA about what the pros and the cons may be.

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