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Your children can actually earn up to $12,200 each as of 2019 without being subject to Federal income taxes. This provides a wonderful way to effectively take assets from the business into the family with an added tax benefit.
Employing your children in your small business can have many advantages. The potential for hands-on teaching, bonding, and countless other teaching/learning opportunities is incentive enough for many, but did you know there can be tax advantages from the family perspective as well?
Your children can actually earn up to $12,200 each as of 2019 without being subject to Federal income taxes. This provides a wonderful way to effectively take assets from the business into the family with an added tax benefit.
The business gets to deduct the payment of wages, but the recipient child may not have to pay any income on this income, keeping 100% of it within the family unit.
Be mindful, the $12,200 limit before income is taxable doesn’t apply only to the wages paid, but also if the child has other wages or even some investment income that counts toward that limit of $12,200. If they have more combined income than this, they will be subject to some income tax.
The reason for this is simple – All taxpayers get a standard deduction from their income of $12,200. If you make $12,200 or less, then your taxable income is $0.
Creating the income for your children shouldn’t be a sham or fake job, there really needs to be an employee-employer relationship. Remember, there are plenty of opportunities here to teach your children about the virtues of employment, getting something for nothing really isn’t one of them.
Using the money paid to fund a ROTH IRA can be another value-added strategy, while also teaching the virtues of saving for the future. The taxpaying child could let that money grow for 45-50 years until their own retirement age, and $1,000 invested at age 15 could be worth $20,000 - $80,000 at age 60, depending on the interest rate earned. ROTH IRA’s grow tax-free and come out tax-free, so you can create a powerful tool with exponential capabilities for your children.
If you would like to explore utilizing this family wealth creation strategy for your family, reach out to us for a free consultation. We can explain all of the ins and outs, and even recommend some financial advisors if you need help opening the ROTH IRA’s.
