The Tax Deductible Allowance
General Business News
The Tax Deductible Allowance
No, Iâm not talking about taking out a college loan or applying for a grant. Instead, why not put your kid to work this summer and let the wages earned serve as spending money for the coming year?
Child Under 18-years-old
Is your college student still under 18? If so, you can really save a few bucks until the child turns 18. Under current law, a child who works for his or her parent(s) in a family-owned unincorporated business can earn up to $9,000 before paying taxes and those wages are not subject to FICA or Medicare withholding.
Of course, you will want to make sure fair wages are paid in relation to the work performed, but itâs not a bad deal. Example; your child turns 18 on August 15, 2006. There are 52 working days between June 1 and August 15. If you paid minimum wage for 8-hour work days, your child would earn $2,142 in wages. The standard deduction for your child will be sufficient to eliminate any federal income tax and, because of the childâs age, no FICA will be due. If you are in an overall 30% bracket, you save at least $643 in taxes, which does not include any reduction in self-employment taxes. Thatâs like providing $1,499 of spending money to your child, while the government provides $643.
Child 18-years-old or older
There will be some additional cost for payroll taxes if you hire your 18+ year-old for the summer, but itâs still a better deal to put your child to work to earn college spending money than forking over the cash each month. Even though you and your child will be paying FICA tax, the gross wages and payroll taxes paid will be deductible. It will be a delicate balancing act to maximize your tax savings between increase FICA for your child verses reduced self-employment taxes and reduced income taxes, but you should still be able to get the government to pay some of your childâs allowance.
Encouraging your child to work for his or her college spending money has other non-financial benefits. The chief one is that it teaches your child the value of a dollar. Money means just more when it is earned than when it is given. A second benefit is that you will know where your child is for at least part of the day. A third benefit is that your child will learn more about your business and you will learn more about your childâs ability to run that business in the future. If you plan for your child to take over from you one day, itâs better to find out how they will take to the business environment early on rather than find out too late that they have no interest.
There are few ways to truly eliminate tax liabilities, but an effective one is to use your childâs labor in your business. You teach them a measure of responsibility and at the same time create a mechanism to reduce your taxes and have the government foot part of your childâs allowance. If you have any questions about whether this technique is valuable to you, give us a call.
In the meantime, have a great month.
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.