Tuesday, September 4, 2012

Why It Pays To Hire Your Kids

Hiring your children not only prepares them for their future and allows you to spend more time with them, but it also offers significant tax advantages.

Having your kids as employees will be most beneficial if they are under the age of 18. The government assumes that you will take care of your underage children if they lose their jobs, so you will not be required to pay unemployment insurance premiums. For similar reasons, the federal government will not require you to pay taxes for Social Security or Medicare.

If your child works for you, you can also open an Individual Retirement Account on his or her behalf. Opening a traditional IRA allows your child to earn a larger income without paying taxes. Conversely, opening a Roth IRA allows your child to put money away into account that can be tapped without penalties in the future.

In order to claim any of these financial benefits, you must follow certain rules when you take your children on as employees. First of all, any work your children perform must be reasonable and necessary for the business. If you would usually pay someone else to perform a task your child is doing, the IRS will most likely consider it to be a valid job. Jobs must also be appropriate for your child's age. For example, you probably shouldn't hire your eight-year-old to program the computers in your office.

In order to hire your children legally, you must also pay them a wage that is consistent with the wage you would pay another employee to do the same work, and you must treat them like all other employees in your company. Make sure that you keep good records in case you are chosen for an audit.

Hiring your kids isn't always the right decision, but it can be rewarding if done correctly. Acting as your child's employer allows you to teach the child financial responsibility while simultaneously reaping tax benefits for your business.

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