One way to reduce the overall family tax bill is by employing family members to work in your business by shifting income to them and providing them with employment benefits.
- Employing your Spouse. Reasonable wages paid to your spouse entitles you to a business deduction. Although the wages are subject to both income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse's retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.
- Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the "Kiddie Tax" rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2011 is $5,800 if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $5,800 in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, but you may provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.
Please keep in mind that when you employ a family member in your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business. Also, it's often easy to overlook the disruption among your other staff that family can sometimes cause (have seen this with many clients over the years). Finally, if you're a professional company or one that has to have licensed staff, while hiring Mom, Dad, or Junior to work for you, make sure they have the proper licensure as well to work for you. It's easy to hire those you know without taking into consideration what they need (or have to have) in order to do the job.
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