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Home » Business And Finance Articles » How Can Hiring Your Kids Help You Save On Income Taxes

How Can Hiring Your Kids Help You Save on Income Taxes?

Hiring your children in your business can be a great tax savings strategy, as well as a way to teach your children about business and money.

Wages paid to your children (between the ages 7 and 17) are a valid business deduction, as long as they do bona fide work, and they are compensated fairly.

Your children can earn up to $5,350 (the standard deduction amount for 2007) before they will owe any income tax. Because you are getting a business deduction for the wages paid to your child, this is income that you also will not pay taxes on.

In addition, if your children are under age 18, you don't have to pay Social Security or Medicare taxes on them. You do not have to pay unemployment taxes on them as long as they are under age 21. This is a huge tax savings since you would have to pay these taxes on any other employee you hired.

Even if you pay your children more than the standard deduction amount, you will still come out ahead. In most cases, your children will be in a lower tax bracket than you, so by paying them a wage, you are shifting income from your higher tax bracket to their lower tax bracket.

Strategy: If you are paying your children more than the standard deduction, they can shelter even more income from taxes by opening an IRA account.

Hiring your children does not raise a red flag with the IRS, but you should document your children's salary and services provided to audit-proof your tax return. To do this, keep a time sheet showing the date, hours and services provided by your children, and write them a check for their wages.

Note: You may have heard of the "kiddie tax". Earned income, including wages that you pay your children, are not subject to the "kiddie tax" rules, regardless of their age.

Example: In 2007, you can pay your child up to $5,350 (the standard deduction amount in 2007) before either one of you would incur any taxes. Suppose you are in the 28% tax bracket and you pay your 15-year old son $5,000 over the course of the year to perform office related tasks.

You get a business deduction for the wages paid to your son, saving you $1,400 (28% of $5,000). In addition, this reduces the amount of profit that is subject to self employment taxes (15.3% of $5,000 = an additional tax savings of $765). Your total tax savings in this example is $2,165.

Since your son's earnings are less than the standard deduction amount, he does not owe income taxes on his earnings. In addition, because your son is under age 18, you do not have to pay Social Security, Medicare or unemployment taxes on him like you would with a regular employee.

Action: If you have children between the age of 7-17, consider putting them on the payroll. You will need to keep time sheets showing the dates, hours and services performed. You should also write them a check to substantiate the wages.

Filing Guide: You will need to file quarterly payroll tax reports (Federal Form 941, state payroll tax forms) for your children (even though no taxes are due). In addition, you will need to file a Form W-2 for your children at the end of the year.

Sources: IRS Publication 15, Chapter 3, Family Employees

And here is another random article you might be interested in...

Tax Exemption for New Singapore Companies

Singapore government has recently come up with some good news for entrepreneurs planning to incorporate a company in Singapore.

For newly incorporated Singapore companies, full tax exemption will be granted on normal chargeable income of a qualifying company up to $100,000, for any of its first three consecutive years of assessment (YA) that fall within YA 2005 to YA 2009.

To qualify for the tax exemption for a relevant year under the new scheme, a company must:

* be a company incorporated in Singapore
* be a tax resident in Singapore for that year
* have no more than 20 shareholders throughout the basis period relating to that year; and
* have all shareholders who are individuals throughout the basis period relating to that year.

A Singapore Subsidiary of a foreign company does not qualify for this tax exemption since the shareholder is a foreign company and not an individual.

Any Singapore company that does not meet the qualifying conditions for any of its first three consecutive years falling within 2005 to 2009 may still be eligible for partial tax exemption.

The Singapore tax system is territorial. Income tax is levied on the net income of companies from sources within Singapore and on foreign source income if remitted into Singapore. Non-resident Singapore companies and businesses are taxed on the same basis.

The company income tax rate is currently 20%. There is no capital gains tax imposed in Singapore. Singapore does not levy a withholding tax on dividends. Interest, royalties or rental of equipment payments to non-residents are subject to a 15% withholding tax.

Income tax for foreign-sourced income is applicable only if the income is remitted into Singapore. A Singapore company can enjoy tax exemption from its foreign-sourced dividends, foreign branch profits, and foreign-sourced service income that is remitted into Singapore if the following conditions are met:

* The highest corporate tax rate (Headline tax rate) of the foreign country from which income is received from is at least 15% in the year the income is received; and

* The foreign income had been subjected to tax in the foreign country from which they were received