Tax avoidance...go ahead and hire the kids this summer

Tax avoidance is as cool as your kids

One of the cool advantages of having your own business is hiring your kids. They may complain about working for you, but wherever our kids work, sooner or later, they’ll complain about it. This particular family bonding time is a tax strategy worth a bit of complaining; and is an excellent example of tax avoidance, the legitimate use of all legal tax deductions under the US Tax Code or state and local tax codes.

The first question

What taxes are avoided by hiring our kids under 18?

Federal Unemployment Tax Act (FUTA),
State Unemployment Tax Act (SUTA, AR) and (SUTA, OK), and
Federal Insurance Contributions Act (FICA)

I like FICA

Of the three, I like FICA for versatility and opportunity. Employers are required to withhold this tax from employee pay, and contribute a matching amount. But not so with children under 18 who work for a parent whose trade or business is a sole proprietorship or a limited liability company taxed as a partnership in which each partner is a parent of the child. However, if your business is an S- or a C-corporation, you don’t receive this benefit.

Even when your kids are over 18, or you’re hiring grandchildren, throw in the possibilities of hiring them as independent contractors. Use this maneuver, and along with the standard deduction benefits, you’ve got options.

Here is a cool and creative tax-avoidance strategy. Mom or dad establishes a sole proprietorship, Mom’s Management Company (Mom’s for short). Your S- or C-corporation then hires Mom’s, and Mom’s sends the kids to the S- or C-corp to answer the phone or whatever. Mom’s bills the S- or C-corp for services and then Mom’s pays the kids a weekly salary.

Income tax withholding

Payment for the services of a child as an employee is, however, subject to income tax withholding, regardless of age. There are, of course, still other tax avoidance strategies for this issue. The standard deduction allows our children to not pay federal income taxes on that first amount of income—and that becomes tax free income that never leaves the household. (Think about this relative to your dependent child being a college student).

Kids and the “kiddie tax”

Don’t worry about “kiddie tax” in this scenario. The “kiddie tax” applies to unearned, portfolio income. Your children will have worked and, thus, they have earned their income.

The bottom line

Use the U.S. Tax Code with attitude and to the maximum. This requires playing by the rules and requires a depth of knowledge and understanding of the current (and ever-changing) tax laws. Remember, there is nothing wrong with practicing serious tax avoidance.

Playing by the rules

In case you have a few questions about the rule book, our ‘zillion-page’ US Tax Code, I can help you. Together, we can put a great plan into action. Call me.

You and your family will have a great summer, and under your watchful eye your kids will learn good work ethics and more about the family business.