Tax Benefits from Employing your Children

Interesting read from the June 2015 edition of Entrepreneur magazine! According to the article "Advantage: Your Business, Two Ways to Make the U.S. Tax Code Work for You" business owners can benefit by employing their children and by converting their business into a corporation. Owners who employ their child, or children, may stand to gain financial and tax benefits. Parents may save themselves some money if an employed child opens a Roth IRA; the IRS allows that child to make annual contributions of up to $5,500. Later, this account can potentially be used to pay for higher education. With the child now contributing to their own education fund, a parent may choose to reallocate a portion of their own budget that was previously dedicated to funding the child's future education, potentially increasing their disposable income. Furthermore, with the addition of a new hire the company's payroll expenses rise, thus creating a tax benefit by lowering the taxable income. Along with this tax advantage, business owners may benefit by converting their business to a corporation. Once incorporated, an owner is able to pay themselves with distributions, along with salaries. The article notes that distributions "are not subject to the 15.3 percent self-employment tax. And as long as the owner is active in the business, these earnings are also exempt from the 3.8 percent Net Investment Income Tax." If you think you may benefit from these changes, make sure to read the attached article and consult with a tax professional.

Source: Wagner, Steph. (2015, June). Advantage: Your Business, Two Ways to Make the U.S. Tax Code Work for You. Entrepreneur. 74.

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