Employ Your Child and Get a Tax Break – For Them and For You

by Craig Pellet, CPA

If you are self-employed, you can help your child get started on retirement savings, and get a tax deduction for doing so. Here’s how to make it happen. First, you hire your child to work in your business – it has to be legitimate work, maybe filing papers, or cleaning your office or store. Then you pay your child (for example) $2000. You now can deduct that $2000. Assuming you are in the 25% tax bracket, and self-employed, it saves you just over 40 cents on the dollar in federal tax, plus more at the state level, if your state has an income tax. At higher income tax brackets, you will save still more.

There’s more. Your child now has earned income, with which he or she can make a retirement contribution. Since a kid’s tax is low, a deductible IRA contribution won’t provide much benefit, so a Roth IRA contribution is best. Your child might owe a bit of self-employment tax – $283 in the above example, but the increase will be much less than your tax savings.

You can also adopt this approach for an otherwise-unemployed spouse. If your spouse legitimately helps with your business, and your business has a retirement plan like a 401k or Simple IRA, you can increase your retirement savings significantly by paying your spouse, and having him or her defer all of the income to a retirement plan. It may also be possible to pay your spouse as an independent contractor, and then have your spouse setup a Simple IRA or a one-person 401(k) for their business of helping you. They could then defer tax on quite a lot of income by maximizing their contribution to the retirement plan.

At John Schachter + Associates, we help clients with clever tax-saving ideas for businesses and the families that run them. Talk to us. Let us know how we can help you.