How to Make Your Kid Pay For College
How to Make Your Kid Pay For College
âTommyâs working today,â Fred answers.
âWorking,â Mark asks with a smile. âYou finally found a way to make him mow the lawn without walking behind him?â
âNo, I mean he is working. I have him down at the office stuffing envelopes along with Jennifer. Itâs a great way to get him learning about real life. He wasnât too happy about missing the cartoons this morning.â
Does this sound like a conversation you might hear on a science fiction show? Around many homes, probably, since tearing kids away from the TV is like bringing Congress out of the Twilight Zone. It just wonât happen. But, around the house of a business owner, this should be a normal conversation.
Business ownership brings with it some pretty good perks, like long hours, self-employment tax and pulling your hair out when you canât find the right employees. It also brings opportunities, such as the ability to hire your children. That opportunity can provide significant benefits, so letâs take a closer look.
Rule number one is make your children earn the most they can without paying taxes.
How do you do this?
First, you need to find something meaningful for them to do for your business. It would have to be something you already do, would do, or would pay someone to do. Then, tell your child he or she has a new job.
If you donât pay them more than the standard deduction, plus $2,000, they will pay no tax. Currently, a child can earn $6,300, put $2,000 of that into an IRA and not pay tax on the remaining $4,300 because it is sheltered by the standard deduction.
Letâs assume your kids take my advice (you do write the paycheck after all) and put $250 into some growth vehicle that yields 12% per year. Ignoring taxes, if they started on their tenth birthday, by the time they started college, you kids have $41,000 to help fund their tuition.
True, you would probably be funding the tuition, but having another source to cover âlivingâ expenses would be nice.
That, however, is just part of the story. Since they are also funding their IRA, by the time they reach college, that fund will be worth $27,359. If the children do nothing else with the money and earn 12% per year, their minimum retirement fund will be $5,628,000 at age 65. This isnât a bad start on retirement.
If your business is a sole proprietorship, or owned only by family members, then you would have additional benefits because you would not be required to pay Social Security or Medicare taxes.
Imagine, all of the above benefits while saving taxes. Given the above scenario, and assuming you are in the 28% bracket, paying your child $6,300 per year for legitimate work will save you about $1,800. Just think, since your child really only gets $108 to spend each month; now, you have a way for the IRS to pay your childâs allowance.
Does all of this sound too good to be true? Ask that question after this final benefit.
Since you are paying for a legitimate business expense, then your self-employment income, as well as your taxable income, will go down. If you havenât reached the maximum self-employment income, you will save almost $900 in self-employment taxes if you hire just one of your children. Not a bad deal.
This is looking better all the time, isnât it? Are you ready to take the plunge and hire your children?
If so, great, but beware of the pitfalls.
First, you will be hiring a family member and this could have a negative impact on your current employee base. Since your employees, in all likelihood, have been heavy contributors to your current success, be sure you donât alienate them by hiring your own family. In the case of a ten year old, that shouldnât be a problem, unless your whole shop consists of ten year olds.
Second, be aware that labor problems can creep up. Just because your child also happens to be your employee, donât expect said employee to go along with you all the time. Most children are likely to feel more comfortable complaining about working conditions or, worse yet, whine about the pay rates more than the average unrelated employee and you donât get a break from the children during the evening.
If your child does work for a substantial time period and invests the income as you suggest, sooner or later, investment earnings will become taxable. Considering your investment earnings will become taxable at some point, this really is not a significant drawback.
Finally, you may have additional record keeping requirements due to paying your employee-child. Again, considering the tax savings the record keeping requirements are not that big of a deal.
In a time when most parents are trying desperately to give their children strong ethics, and sometimes fighting a losing battle, this is one way to instill a work ethic in your children. So what if it helps save you and I taxes along the way? Isnât that the American way?
So, take a look at what your children may be able to do for your business. Then, give us a call so we can determine your best move with respect to this key planning point available to business owners.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.